Don't talk innovation but dwell on incremental improvement
Guide to episode
- Words mean something - and that meaning is critical to the interpretation and action that result
- Most companies improve. A few innovate. Very few disrupt
- The same change could innovate one industry and disrupt an adjacent one
- Manufacturers think of innovation in products - business model disruption is more important to consider
Hi, I’m Ed Marsh. Welcome to this episode of Signals from the OP. In military parlance an OP, or observation post, sits far enough out ahead of your lines that you can detect threats and have early warning. I do the same for businesses here – watching what’s happening in technology, markets, strategy and the economy to look for signals that might be missed amidst daily management challenges, but cold provide early warning of opportunities and threats.
Today I want to unpack terms that are often conflated.
- Incremental improvement
- And disruption
For simple definitions we might use the following:
- Iteration, or incremental improvement, is doing the same things, better
- Innovation is doing new things
- Disruption is doing new things that make the old ones obsolete
They mean very different things. Different companies, with different leadership personalities and skill sets; with different philosophies; and in different industries, will experience them differently.
But it’s important to use the right term and have a common understanding when we discuss change – that allows management to figure out where they want to position their company, based on current capabilities and future aspirations.
And it helps us avoid the biases that sometimes accompany grandiose terminology.
I’ll use analogies from the B2B industrial capital equipment space where many of my clients are.
When machine builders transitioned from standard drives to servos, that was an improvement. Changeover times decreased, accuracy improved and quality and output improved as well. But you still had machines, operators, electrical and air requirements, factory floor space requirements, etc.
Adding IIoT or industrial internet of things sensors to those same machines is also simply an improvement. However, using the data they collect to reduce down time with predictive maintenance, for instance, is an innovation. Blockchain is often discussed as being disruptive, but in it’s highest value applications it’s probably just innovative. For instance, some of the most exciting and practical work is in speeding and simplifying logistics. Some reports suggest that global shipping times could be reduced by 30-50% resulting in enormous savings. And for manufacturers it offers some interesting capability to improve or simplify the process of tracking warranties, guaranteeing the origin of OEM parts, etc. But in both cases, the original work continues – containers are shipped, and spare parts are delivered.
Disruption typically involves challenging a fundamental accepted fact. It may mean making something obsolete. For instance, what if 3D printing advances to the point where factories as we know them are no longer necessary? If all manufacturing was replaced by localized printing, then logistics and distribution channels fundamentally change.
There’s a twist to keep in mind. What’s innovative in one case could be disruptive in another. If you’re a customs broker or freight forwarder, the impact of blockchain on your work could be absolutely disruptive, even though steamships would still haul containers across oceans where gantries would take them from the ships and load them onto trailer chassis.
And disruption in manufacturing is hard. Manufacturers tend to be linear thinkers. That’s a good thing if you need to bring raw materials in one end of the plant and with ever greater efficiency ship finished goods out the other. It also means that they tend to think in terms of incremental improvement, and perhaps innovation. They don’t typically carry all the way through disruption. In fact disruption threatens the very products which they’ve lovingly created!
I believe that disruption in the manufacturing space is going to be increasingly manifest in business model changes and revenue streams associated with data.
Let’s dive further into disruption, because that’s where the greatest threats and opportunities are.
Clayton Christensen – the HBS expert who coined the term disruptive innovation, explains disruption as something that displaces an existing market, industry or technology and produces something new. Paradoxically the disruption often starts as a simpler, less expensive intruder in a market of well developed, complicated and expensive solutions. He says “An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.”
What does this mean for typical middle market manufacturers? Well lets look at business models and data.
Who says that capital equipment needs to be bought and built the way that it is? Why can’t the end production result be delivered as a subscription product which includes access to equipment, materials, expertise, support, service, maintenance, parts and ongoing optimization consulting? Many manufacturers have some subscription type revenue (for instance maintenance contracts) but it’s not core to their financial model which harvests working capital from progress payments and tends to fluctuate with economic cycles. Rising generations of engineers and operations folks will naturally expect subscription models – that will create an environment favorable for disruption, and a disrupter which acquires used machines for short money during a downturn could easily displace the more expensive OEMs with a new business model.
Further, the reality in many B2B sectors is that quality across manufacturers has reach near parity. Most of the differentiation companies attempt is based on insignificant or even contrived differences. However, the ability of companies to drive consistent business outcomes for their customers varies widely.
We talk about this in terms of value, and in some sophisticated discussions around total cost of ownership we get beyond maintenance costs and look at outcomes. But it’s going to become even more pronounced as data, and the insights which can be extracted, become the real source of new revenue streams.
If most manufactured goods have reached some approximation of quality parity, then what happens next will become the differentiator. That means, enabled by the innovation of IIoT, the data which is collected will become an enormous asset to the manufacturer. They’ll have opportunities to deliver new services from monitoring it, analyzing it and offering insights for operational improvement which they can tie to actual savings. They might even find new 3rd party customers. Imagine for instance a machinery manufacturer who has data on operational parameters from hundreds of installations and can determine what consumables work best in what industries / conditions, etc. They could monetize that insight in a number of ways that would benefit everyone.
Here's the point – some of this is perhaps way off. Some might never happen. But it illustrates the difference between iteration, innovation and disruption. It does no good for a middle market manufacturer to claim to others and convince themselves that they’re one, if in fact they’re not. Real strategy and success, through what will be a period of tumult and honest disruption, will require that companies decide where they fit in the process, and build their models and strategies accordingly.
I’m Ed Marsh. Thank you for joining me for this episode of Signals from the OP. If you enjoyed it, please share it and subscribe – either to my youtube channel EdMarshSpeaks.TV or at the related blog SignalsFromTheOP.com.