Redefine Your Innovation to Survive Industry Transformation

The manufacturing industry is undergoing a fundamental, longterm transformation, and the approaches to innovation that worked in the past won’t be enough this time.

By 2025 a new global consuming class will have emerged, and the majority of consumption will take place in developing countries, which means new opportunities for many organizations. These shifts in demand will coincide with the emergence of breakthrough innovations in materials and processes, such as nanomaterials, 3-D printing, and advanced robotics.

To adapt to these changes—while overcoming persistent margin pressure— manufacturers will need to redefine what innovation means for their businesses.

The Importance of Innovation

Innovation has always played an important role in the success of manufacturing. But in recent years, its role at manufacturing companies has changed in several fundamental ways.

First, innovation is now a top business imperative. Almost half of all industrial manufacturing executives surveyed by PwC said that R&D and innovation are their top investment priorities for the coming year. There’s evidence that manufacturing executives are backing this up with investment, as noted by a KPMG study, which found that 70 percent of the surveyed manufacturing executives said they would at least double their R&D investment over the next two years.

Second, the approaches to innovation that worked in the past won’t suffice in the future, in large part because manufacturing is undergoing change. McKinsey & Company predicted that by 2025 a majority of economic activity will take place in developing countries where there will be rich opportunities for manufacturers.

To adapt to these changes, and still deal with the existing pressure on margins, manufacturers must redefine what they deem to be innovation.

Know the Obstacles

The combination of new market forces and outdated internal processes can conspire to make innovation that produces tangible new business value tough to accomplish. Here are some of the underlying factors:

•Lack of marketplace insight. Manufacturers often are handicapped by their lack of insight into the new markets they’re trying to enter. It’s hard to create a successful innovation for a market segment if the people responsible for that innovation don’t have a deep understanding of the underlying issues and opportunities in that new market.

•Difficulty in protecting intellectual property (IP). Manufacturers face increasing risks that IP will be stolen or compromised in some way. For example, the annual losses to all U.S. companies from IP theft are estimated to be $300 billion, an amount equal to the total value of annual U.S. exports to Asia, according to the “Report of the Commission on the Theft of American Intellectual Property.”

Globalization makes it difficult to thwart this risk. As the manufacturing industry becomes more global, an increasing number of a manufacturer’s business partners will be located in countries that have less effective IP protection. So, if an important piece of IP is stolen in a foreign country, the manufacturer may have little or no recourse. Making the situation worse, many foreign-based companies may be a partner on one project and a competitor on another.

•No margin of error for misguided innovation. In recent years as financial margins have shrunk for manufacturers, so has their ability to tolerate misguided innovations that don’t meet a specific customer demand.

It’s a problem on two levels. Because of tighter margins, manufacturers are less apt to have financial resources that they can, in effect, squander. In addition, innovation is increasingly a fundamental driver of new sales in many industries where purchasers have already met their basic needs with existing products.

Make Innovation

More Innovative

What should manufacturing companies do to clear these hurdles? In short, respond with a more innovative approach to innovation. Following are six fundamental ways to improve innovation:

1. Make it pervasive. Innovation shouldn’t be confined to R&D activity. When manufacturers create a culture of innovation throughout their organization, they can derive greater business benefits. Evidence suggests that more manufacturing executives are fostering a culture of innovation. To create this culture, though, they first need to create collaborative work environments, and information technology can play a key role.

2. Make it market-driven. Innovation needs to solve a recognizable customer need.

3. Make it financially sound. To make innovation more pervasive and more market-driven, manufacturers need to measure it against the financial metrics that they apply to other parts of their business. Given the high cost of innovation, it’s critical to know what kind of return they are getting.

4. Make it agile. To keep pace with customer demand for faster introduction of new products, manufacturers need to accelerate the product development process. Just as important, they’ll need to be able to identify innovations that aren’t going to meet critical financial metrics and to cut their losses quickly, so they can move on to something more promising.

5. Make it comprehensive. Manufacturing companies need to broadly define what comprises their market driven innovation. Innovations don’t have to be limited to new products. In many scenarios, entering into partnerships with other companies can produce an innovation more quickly and effectively than investing in new technology.

6. Make it secure. In light of the risk of IP theft, manufacturing companies need to make sure they have protections in place to safeguard their innovations from theft and still actively work with new partners in new markets. Implementing the right data management structure is an essential part of securing innovations. Protecting IP by using manual processes or by putting the IT department in charge may prohibit companies from creating a vibrant innovative culture.

Transformational change is the new normal in manufacturing. Transforming their approach to innovation will play a key role in determining if manufacturers can successfully keep pace with the major shifts occurring in the industry.

It will be a daunting task, but with success in innovation comes success in the overall business.

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