Innovating for the Numerator


The National Academy of Engineering identified fourteen "Grand Challenges for Engineering" that must be addressed in order to achieve a sustainable, economically robust, and politically stable future. (see the full list here) The challenges are a call-to-action for solutions to some of the most pressing issues in the 21st century: identifying safe and clean energy resources; providing for human health, nutrition and security; restoring and reinventing infrastructure for urban habitation; advancing computing power and capabilities; and developing new tools for teaching, learning, medicine and scientific discovery.

Solutions for many of these challenges require advanced manufacturing - the rapid transfer of science and technology into manufacturing products and processes.  Making solar energy more affordable will require the manufacturing capabilities to produce solar cells at lower costs. New bio-manufacturing techniques are needed to engineer better medicines. Improving urban infrastructure requires the manufacturing expertise to design and produce the parts and tools needed to construct advanced electricity, communication, and transportation systems.

With all this at stake, SAS is proud to be a sponsor of the academy's "Manufacturing for the Grand Challenges Summit” taking place on October 31-November 1st at the Umstead Hotel, adjacent to SAS’ Cary campus in the Research Triangle region of North Carolina, where leading industry executives, academic leaders, state government officials, and federal agencies will explore the manufacturing and engineering capabilities needed to solve grand challenges in the 21st century.

One of the key topics identified for discussion is “Innovation in Manufacturing”, addressing questions such as:  What are the most important innovations needed for advanced manufacturing regarding technology, materials, processes, and applications?  How can we remove barriers to adoption of advanced manufacturing across the phases of early-stage research to prototyping to production?

Clayton Christensen, professor at the Harvard Business School and author of “The Innovator’s Dilemma”, addressed exactly this issue of innovation in manufacturing as the kick-off keynote speaker at the World Business Forum in New York earlier this month.  He shared with us a profound observation about why this current economic recovery, as well as the several other most recent ones, have been largely “jobless” recoveries, unlike all seven post-war recessions prior to 1990.

Christensen places the blame on what he calls the “Church of Finance”, but to understand what he means by that we need to first explore his three categories of innovation:  1) Disruptive, 2) Sustaining, and 3) Efficiency.

Disruptive innovation is what Christensen is most known for promoting – the empowering new products and ideas that most of us think of when we think of innovation.  In recent times these would be things like iTunes, digital photography, and hybrid or electric automobiles.  Disruptive innovation creates jobs and consumes capital.

Sustaining innovation can be summed up as going from ‘good-to-better’.  As critical to the economy as disruption, sustaining innovation is much more common.  No new ideas are introduced, but initial disruptive innovations are improved and extended with new features, functions and improved performance and quality.  Examples include the subsequent development of smart phones and most of the history of the automobile industry (the Tucker being a notable exception).  Sustaining innovation is neutral on job creation and capital consumption.

Efficiency innovation is what enables the value discipline strategy of Operational Excellence, or as it is more commonly called – low-cost producer.  Reducing costs, materials consumed, weight and volume, and inventories – doing more with less.  Lean manufacturing.  The history of the personal computer is a prime example of continual cost reduction (as well as sustaining performance innovation).  Innovation in efficiency results not in job creation, but job reduction, and it releases capital in the process.  Compared with the other two categories, a focus on efficiency tends to shrink an economy.

This is where the Church of Finance comes in, with their capital efficiency metrics and ratios.  No longer is it sufficient to just make a ton of cash and call it a day.  Our financial market-driven economy is now obsessed with efficiency ratios – return on assets, return on capital employed, return on equity, etc …  I am as guilty as any (see this prior post), the efficient use of capital having been grilled into me from my very first undergrad business economics course.

Unlike a scalar metric like ‘cash’, ratios can be affected by changes in either their numerator or their denominator.  And as most experienced business and finance people know, it’s a heck of a lot easier to shrink the denominator than to increase the numerator.  Our desire to satisfy Wall Street has resulted in a lopsided, out of balance approach to investments in innovation.  Over the past several decades the emphasis has been on reducing that denominator, decreasing the use of cash, capital, assets and equity, to the detriment of investment in disruptive innovation that could impact the numerator.

Christensen calls this the “Capitalist’s Dilemma”, and cites Japan as exhibit A.  This unhealthy focus on the ratios, and especially on the denominator, on capital efficiency, has led to consequences entirely predictable from the model: fewer jobs and an excess of capital and uninvested cash.

The way out of the Capitalist’s Dilemma is not entirely clear.  Growing that numerator is hard work.  New sales, revenue growth, new markets, new products, killer apps and killer brands.  Those gifted and successful at growing the numerator become legends, precisely because it’s such a rare skill.  Whereas, similar to the saying that you can’t cost-cut your way to prosperity, experts at reducing the denominator tend to remain in obscurity.

Disruptive innovation hasn’t disappeared completely of course.  Many companies are quite good at innovation.  Skunk works and think tanks abound.  New venture-backed businesses are launched every day.  And in today’s global economy the innovation (design / R&D) component is often entirely separate from the manufacturing, each often occurring in different firms spread across both geography and time.

Disruptive innovation is risky, generally much riskier than investments in efficiency.  For this reason, disruptive innovation often occurs within organizations more tolerant of the risk than Wall Street might otherwise accept, such as the core scientific R&D that comes out of government and university research.  Which is one of the reasons why this month’s Grand Challenges Summit has been conceived of as a three-way partnership between industry, government and academia.

While you might not be able to simply command your staff to become more creative and innovative (“Come on folks, your economy needs you!”), there may be ways, through the use of analytics especially, to reduce the risks involved in disruptive innovation.  Much of the analytics that SAS pursues and supports is around “insight”, around “tell me something I don’t know”, around finding the correlations and relationships between innovative ideas that might not be readily apparent.

If disruptive innovation is your business strategy, know that just as advances in business process improvement and re-engineering has reduced the operational risk in efficiency investments that drive down that denominator, advanced analytics can likewise provide for a comparable reduction in risk in pursuing the growth of that numerator.


About Author

Leo Sadovy

Marketing Director

Leo Sadovy currently manages the Analytics Thought Leadership Program at SAS, enabling SAS’ thought leaders in being a catalyst for conversation and in sharing a vision and opinions that matter via excellence in storytelling that address our clients’ business issues. Previously at SAS Leo handled marketing for Analytic Business Solutions such as performance management, manufacturing and supply chain. Before joining SAS, he spent seven years as Vice-President of Finance for a North American division of Fujitsu, managing a team focused on commercial operations, alliance partnerships, and strategic planning. Prior to Fujitsu, Leo was with Digital Equipment Corporation for eight years in financial management and sales. He started his management career in laser optics fabrication for Spectra-Physics and later moved into a finance position at the General Dynamics F-16 fighter plant in Fort Worth, Texas. He has a Masters in Analytics, an MBA in Finance, a Bachelor’s in Marketing, and is a SAS Certified Data Scientist and Certified AI and Machine Learning Professional. He and his wife Ellen live in North Carolina with their engineering graduate children, and among his unique life experiences he can count a singing performance at Carnegie Hall.

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