Austrian economist, Joseph Schumpeter, once commented that: “The same process of industrial mutation - if I may use that biological term - that incessantly revolutionizes the economic structure from within, incessantly destroys the old one, incessantly creates a new one. This process of creative destruction is the essential fact about capitalism.”
The breakdown of existing industries opens opportunity for recombination into new industries. Markets never really find balance. Markets always change the rules. Recurring cycles of destruction free up talent and resources. In fact, the organization’s entrepreneurial ability to cause disequilibrium creates wealth. The constant disruptive innovation of these economic actors shakes up the economy, breaking down old methods and building up newer and better ones. This also plays out in the industrial automation space.
Disruptive innovation and the opportunities
Established industrial automation vendors typically provide technology to the oil & gas domain. Most employ incremental, rather than radical innovation. This approach tends to enhance competence, perpetuates their respective hold on the market, and doesn’t significantly reduce their accumulated knowledge and skills. This approach is understandable, as it avoids obsoleting their investments and doesn’t require new skills. While this also appeals to many existing mainstream end users who, initially at least, have no use for disruptive products or services, it may not be in anyone’s best interest.
Major end user organizations like Shell and BP are themselves adapting radical, disruptive innovation for upcoming technologies (new energy sources, electric vehicles, hybrid batteries, etc.). This disruption can create competition with the current technology incumbents. In this instance, the end user organizations make their strategic investments without existing relevant products to sell, presenting a challenge to the revenues and products of the incumbent technology providers.
Innovation management guru, Clayton Christensen, believes that introducing disruptive innovation creates jobs and growth; sustaining innovations to make products better, improve margins, gain market share; reduce manpower, increase free cash flow, and contribute to competitive displacement. The “content” business model innovation, proposed by Amit and Zott in a 2012 MIT Sloan Management Review article, has enabled current end users of technology to add novel activities by forward or backward integration with maximum use of their complementary assets. Fortunately, while end users are entering new businesses, technology incumbents (automation vendors, in this case) can decode the opportunity lying in the coming years from the same customer to start developing its new capabilities.
Industry value drivers
The industry value drivers have been changing rapidly, requiring the ecosystem to weave around the digitization of industry. This reinforces all stakeholders and players and, in a few cases, transforms competitors into “complementors.” The market expects automation vendors to lose their current risk-averse attitude towards investing and transforming a novel idea into a product or service. The sought-after value should present multi-faceted benefits to customers, enabling them to: increase asset utilization, operating efficiency, and safety; reduce maintenance costs and asset downtime; improve process performance; anticipate risk; and, most importantly, generate new revenue.
Leveraging complementary assets and protecting imitation
In the earnings calls for industrial companies, Apple frequently gets attention for its strategy teardown and the “secret sauce” of the mammoth ecosystem built by Steve Jobs. The market conditions are rapidly moving from “disruption” to “ecosystem builder” in the changing industry.
Industrial giants like GE, Honeywell & Siemens do not lack all the appropriability (through legal protections like Intellectual Property) and can bundle complementary assets (brand, distribution, manufacturing, marketing, etc.), while considering organizational capabilities to successfully implement open innovation that makes best use of technological and business innovations (Readers can refer to the Teece Model of Imitability & Complementary Assets). According to a 2007 article by Hansen and Birkinshaw in the Harvard Business Review, diffusion, the most challenging stage of the innovation value chain, is perceived where the penetration in desired markets, channels, and customer groups happen in short time and before the competitor can make preemptive launches in other geographies.
In their 2011 article in the California Management Review, O’Reilly and Tushman posit that ambidexterity, which consists of commercial exploitation and creative exploration, forms the new character of such organizations by either spinning off a division or creating an entrepreneurial venture arm. Honeywell, for example, has done both by recently spinning off one of its popular and well-known product lines and, in parallel, launching Honeywell Ventures.
Edwin Huddleson, a modern venture capitalist stated, “Never invest your own money in your own technology. With your own money at stake, you’re more likely to act to protect it”.
Industrial automation companies need to discover the structural hole in the market network structure, a game-changing business model for innovation. Separating the venture firm from the mother firm can provide real entrepreneurial power. It should be freed up from quarterly P&L. There is great need of organizations to keep their business groups or units connected, yet disparate. Long-term strategic objectives should supersede the short-term revenue growth. The system of activities should be weaved such that innovation is sustained perpetually.
About Andy Jain:
Andy Jain is a Service Specialist at Honeywell. Previously, Jain had served various leadership roles in engineering organizations within the oil & gas domain in various countries. He is an independent strategic consultant to the SMEs. Jain recently finished his Post-Graduate Diploma in Strategy & Innovation from the University of Oxford, UK and earned a Professional Certificate program on Innovation & Design Thinking from the Massachusetts Institute of Technology in the US. Jain has a degree in instrumentation & control engineering from the Nirma University, India.