Spark, flame or bonfire: Why balanced innovation is the only way forward for U.S. manufacturers

Balanced innovation for manufacturersWhen Martin Richenhagen was named president and CEO of AGCO in 2004, the agricultural equipment manufacturer in Duluth, Ga., was generating about $3 billion in annual revenues. Less than 10 years later, the company had more than quadrupled that number. “All that growth comes mainly from new products,” Richenhagen says.

The company invests roughly 4% of its annual sales in R&D to stay at the forefront of innovation. From developing state-of-the-art hybrid combine harvesters to incorporating telemetry-based tracking systems in whole product lines, AGCO's investment in innovation ensures the business —and the world’s farmers — can harvest healthy returns.

Richenhagen says his company’s primary competitive advantage is that it “leads through innovation,” and he’s not alone. Across the nation, U.S. manufacturers are pouring time and money into R&D efforts so that they can continue to roll out innovative new products and streamline operations to stay ahead of the competition. This matters. “Innovation is the key to competitiveness, whether you manufacture potato chips or rocket ships,” says Henry Cialone, president and CEO of EWI, an engineering consulting firm to the manufacturing industry.

For Jeff French, leader of Grant Thornton LLP’s Manufacturing practice, it’s critical that this innovation drive comes from the top. “If you have an innovative CEO or leader in your business who encourages innovation for employees, they’ll want to outdo your competition,” he says. “That’s going to drive some really positive outcomes.”

Balanced innovation: Rethinking products, processes and business models
Product, business model, process innovation importanceIn our survey of leaders across the industry, we found that innovation is top of the agenda for the vast majority of U.S. manufacturers (see Chart 1). The survey also found that they are committed to end-to-end or “balanced” innovation across not only products and processes, but also business models:
  • 84% believe that product innovation is important
  • 79% put a premium on business model innovation
  • 82% prize process innovation

Confidence is also healthy, with the survey showing that 43% rank their “innovation capability” as above average.

Product innovation

The survey found that a focus on product innovation has been the No. 1 action U.S. manufacturers have taken to reposition themselves in the market over the past three years. This is especially the case for midsized manufacturers in the $1 billion to $5 billion range. In that midmarket segment, 87% point to product innovation as a key area, compared with 79% of smaller manufacturers ($100 million to $1 billion) and 81% of large ones ($5 billion to $15 billion).

The new industrial revolution: Machine-to-machine
•  The Internet of Things (IoT) — smart, connected devices that create cyberphysical production systems — offer significant opportunity for the future of manufacturing.
•  According to a recent Gartner report, last year 278 million factory machines, construction vehicles and other pieces of industrial equipment were connected to the IoT. The report predicts that by 2020 that number will nearly double to 526 million.
•  International Data Corp. estimates that companies around the world will spend around $120 billion in 2015 to connect factory operations, building systems and mobile equipment to the IoT.
Process innovation

Larger manufacturers are especially focused on process innovation (87% vs. 79% of midsized companies). Many large companies compete by providing customers with consistent, reliable, and low-cost products and services, calling for highly streamlined and efficient operational processes.

For Andrew Wilson, Manufacturing Tax practice leader at Grant Thornton, process innovation is a must-do for American manufacturers, given the competition from low-cost countries.

“Manufacturers are taking processes that used to be very manual and are automating them to compete with manufacturing powerhouses such as China. Successful companies are continuously innovating and using technology to stay competitive.”

Midmarket manufacturers poised to reinvent the industry’s business model
In today’s disrupted environment, business models — once thought bulletproof — can suddenly look very vulnerable. The technology-enabled disruption by Airbnb of the hotel industry, or Uber of licensed taxicabs, demonstrates to all sectors — including manufacturing — the need to innovate the business model. Added urgency comes from the ease with which manufacturers from across the world can imitate products. If a manufacturing organization does not innovate its business model, it could get left behind.

Innovation and R&D in numbers
•  The U.S. government and private sector have consistently spent more on R&D in the manufacturing space than any other nation.
•  Manufacturing industries were responsible for 69% — or $208 billion — of domestic R&D spending in 2013, according to the National Science Foundation.
•  The 2015 U.S. budget earmarked $65.9 billion for nondefense R&D, including $2.2 billion specifically targeting advanced manufacturing R&D — a 12% increase from 2014.
Many manufacturers are responding to these competitive pressures — and the opportunities offered by new technologies — by delivering significant business model innovation today. This is particularly apparent in the move to a service model in manufacturing. Take traditional equipment manufacturers, who now offer services around preventive maintenance and repair, remote diagnostics, and command and control systems.

For example, mining equipment manufacturer Joy Global offers connected services to its clients, providing critical information to optimize production yields. Sensors embedded in Joy Global’s machines, which are operating in difficult conditions underground and some of which are up to 1,300 feet long, relay critical information to its monitoring network. There are also sensors in nearby roof supports that detect pressure changes so that operators can monitor when collapses are likely.

Business model change in the next 3 yearsThis need for business model innovation is clear to our respondents, with 79% classifying it as important. In terms of the evolution of business model innovation, many see it as a priority for the future, rather than a transformation that has already occurred. While a quarter of respondents (25%) say their company has already made a major change to its business model, 41% expect to make such changes over the next three years (see Chart 2).

Midmarket manufacturers in particular are bullish about business model innovation. Almost one-half (46%) of our respondents say their business model will be completely revised or significantly changed in the next three years, compared to just 29% of large companies. This suggests that adaptive service-focused business models are the way of the future for midmarket companies.

There are, however, significant challenges in designing and delivering a new business model strategy. At the strategy design stage, change to the business model asks tough questions of the organization. It can involve an organization challenging long-held beliefs and even entrenched interests within the organization, who might see change as a threat to a long-standing product line. Business model innovation, while it may be enabled by new digital technologies, is more about the change required in people and the organization’s mindset.

Business model innovation also creates significant delivery challenges. New key performance indicators will need to be designed that reflect the transition from a product focus to a service focus. Current processes will need to be re-engineered to enable new services. New partner and supplier relationships will need to be made. And, where services are based on connected machines and big data, significant changes will need to be made to the IT infrastructure. In addition, organizations will need to closely manage cybersecurity and the risk of data breaches.

These are significant challenges. However, not resolving them could result in organizations failing to grasp true business model innovation. Instead, they end up making a piecemeal change to how they make money, rather than grasping the full opportunity.

Innovation doesn’t always have to make the headlines
All innovation — product, process and business model — rests on creativity, new ideas and fresh perspectives.

Take LG's recently released Eco Hybrid dryer, which integrates heat pump technology into the dryer system to recycle the heat generated, cutting energy use by 50%. Alternatively, consider global engineering firm Fluor’s Modular Execution system, which allows construction teams operating in dangerous or remote conditions to complete key construction steps in safer, more controlled environments before shipping them to the site. Both of these innovations are recipients of the 2015 Edison Award, which recognizes the most innovative new products, services and business developments in the world.

But here’s the reality: While game changers garner the headlines, not every innovation is a disruptor. Many manufacturers today are focused on incremental innovations that generate ongoing improvements to already popular products, or revisions to operational processes to drive efficiencies, improve quality or lower risk.

At Big Tex Trailers (a trailer manufacturer based in Texas), one of the most impactful innovations the company made last year was moving from a liquid paint system to a more durable custom primer and powder paint application. This new product can withstand the harsh salt sprays used on roads in the northern regions. “It tripled the length of salt spray corrosion resistance our trailers can withstand during the wintertime in the Midwest and Northeast,” says Lance Reinhard, company president. Not only does this incremental change improve the overall quality of his company’s products, it gives Big Tex the agility to easily transition products from one geographical region to another as demand fluctuates.

Prayon, the Georgia-based chemical manufacturer, is pursuing similarly incremental innovations under the guidance of a new forward-thinking COO, whose mission is to rethink the way the company operates. When he was hired last year, one of the first things he did was challenge production line employees to figure out how they could flush chemical lines faster when switching from one product to another.

For the past 50 years, it has taken 24 hours to flush the lines and get them ready for a new product. “No one ever challenged that,” says Beth Allen, vice president of finance and administration at Prayon. “Then he [the COO] came in and said, ‘We need to get it down to six hours.’” The production team was skeptical, but they brainstormed ideas, identified modifications, and he set aside R&D dollars to upgrade aspects of the production line. Within 10 months the flush time was cut from 24 hours to less than eight, which freed up hundreds of hours of production time. “What we considered to be a sold-out plant, he took to having a month of free capacity,” notes Allen.

Balanced innovation is the key
U.S. manufacturers are geared up and ready for innovation — across their products, processes and business models. Having a balanced approach across these innovation priorities will be key. Manufacturers will need to focus on innovations or changes to existing products or services.  However, neglecting more transformational innovation of the business model — while it is harder to do — could be dangerous. As Brian Raymond, director of technology and domestic economic policy at the National Association of Manufacturers, says: “They have to become innovative in every aspect of their business, or they’re not going to survive.” U.S. manufacturers have always risen to the innovation challenge. So go ahead, start your innovation machine with a spark, flame or bonfire.

Key takeaways
  • Don’t get complacent. Just because you’ve always done it that way, doesn’t mean it can’t be improved. Thinking more holistically about your processes will help you uncover new opportunities for innovation.
  • Get out of your ivory tower and talk to your people, customers and suppliers. The best ideas can often come from the shop floor, so talk to your people about innovations they would like to see made. Chances are they have great ideas that can quickly generate big savings or new revenues.
  • Keep your finger on the pulse of innovation. Ensure your innovation strategy takes into account the major technologies reshaping the marketplace. That means looking at whether robotics, new materials, cloud-based computing and smart technologies can help you cut costs, improve safety and make better products for your clients.
  • Look everywhere for innovation opportunities. Every step in your operation is ripe for innovation — you just have to look for it. From new business lines to new product features, the more you identify ways to improve on your process, the better your business will be.
  • Take advantage of incentives. From applying for incentives from the National Science Foundation, to making sure you understand what exactly the R&D tax credit is and what applies, there are a lot of ways to lessen the cost and risk of innovation investments. Taking the time to educate yourself about these opportunities ensures you will get the most bang for your buck.