02 Apr Four Way Tug of War
Technology change is constant! This is true for manufacturing as well. Let’s talk about the relation between new technology, ROI, desired future state and key considerations for investment. (Exhibit A.)
Consider a paradigm shift that occurred due to ERP-MES with the advent of software in the ’80s-’90s (not shown on the timeline), followed by a period of ambiguity around the new Industry 4.0 paradigm. For the most part, those who made timely investments towards these new technologies saw positive changes and reaped benefits in terms of projects (A to C), reaching favourable ROI.
Around point C, the manufacturing world started to talk about – THE PARADIGM SHIFT! Industry 4.0, i.e. the trend towards automation and data exchange including cyber-physical systems (CPS), the internet of things (IoT), industrial internet of things (IIoT), cloud computing, cognitive computing, and artificial intelligence, is now the focus.
The period highlighted from C to D is marked by ambiguity for many of us in the manufacturing world. What are these new technologies? How do they apply to us? Will we be able to benefit from these? What skill sets will be required internally to develop these? Who will we partner with to develop these for our application? What will be the investment required? What will be the ROI? Does it align with our long-term goals?
Need for Investment
Eventually we realise that this change is inevitable; however, it needs additional knowledge, building out prototypes or pilots, changing existing legacy systems, developing new skills, developing new partners/supplier network, etc. It needs new INVESTMENT! This period from D to F does not have good ROI, but is essential to enable projects of ongoing improvements and projects with favourable ROI periods G to J. So what makes us take the leap of faith and do steps D to F even though there is no guarantee of success? It’s what I call the desired future state.
Desired Future State
So, what is this desired future state? It’s a state that, once reached, will generate superior business value in one or more of the following:
- Customers – higher customer satisfaction in terms of service, quality, cost and/or product offerings
- Market position – better competitive edge
- Employees – new skills, better careers/opportunities, higher job satisfaction
- Shareholders – higher return on investments
- Society – positive impact on our communities and environment
- Company – last but not the least, it moves the company closer to its purpose/mission
One can see it requires progressive leadership and passion to conceive this desired future state. This starts with building the right team and securing finances. Then taking calculated short-term risks by betting on projects that may not have such good ROI, and course-correcting along the way. Most importantly, it requires leading through change.
The Path to Financing
Securing finances is usually one of the biggest challenges in making this paradigm change a reality. Please see Exhibit B for the stages of finance progression: Current state (old paradigm). Generate new profit and savings streams to fund the paradigm shift (transition). Re-allocate current profits to fund the new initiatives (Industry 4.0 paradigm).
In recent times established companies have struggled in the transition (between C & D on Exhibit A) while new entrants (Amazon, Uber, Airbnb) have taken advantage of the advancements in the internet/digital world, spending through the phase from D to F to innovate, develop new systems/technologies and gain new customers. The ROI for the first few years is not great; there is even a heavy loss on their P&L. Yet once they pass point F, they will be well on their way to their desired future state. They will win over more customers and continue to outdo their competition.
First Movers Advantage
Another example of this is Blockbuster which stayed with brick & mortar and DVD/CD delivery model (between C & D) and did not move to online streaming, though they knew about it. They refrained from investing because this had a longer ROI timeframe and they also made a significant income in late CD/DVD return fees. So there was resistance to investment in new paradigm.
At that same time, Netflix saw the coming trend, customer need, the technology and envisioned a desired future state that could bring great value to the customer. This created a great competitive advantage for Netflix and we all know what happened to Blockbuster.
Also, there is something to be said about who reaches the desired future state first and builds the first movers advantage (Netflix vs. Amazon Prime in online streaming wars).
- Recognize a paradigm shift in technology that affects your line of business and re-organize to take advantage of it, in spite of the short term pain. It is worth the risk to be the first mover, to gain an advantage over the competition and wow the customer. In the absence of courage to change, we will stagnate, eventually fall behind or even cease to exist as a company.
- Have a desired future state, a strong and passionate vision for where to take the company. This will help make the mid-to-long term bets in terms of investments, reorganization, reskilling and overall direction.
- ROI is just a financial efficiency metric of the use of capital. I believe it is better to invest in projects that help you reach your desired future state and provide great value to all your stakeholders. And strategically organize financials to pay for a paradigm shift in technology.