Overcoming Technology Myopia of Industry 4.0
Originally published in ISE Magazine in September 2020.
Industry 4.0 (I4.0) is a technology paradigm. It was born as a response to changing markets that demand more agility and flexibility. But popular I4.0 literature seems to have lost sight of the market pressures and solely focuses on technology names.
Most I4.0 definitions give a catalog of productized technologies, at best, a list of use cases, describing which technologies are relevant to I4.0 but missing a good holistic explanation of what I4.0 itself is. On the other hand, the broader I4.0 ecosystem focuses on `spot use cases related to assets, connectivity, and machine metrics to increase process productivity. Although productivity is still important today, competition occurs on the agility front for many industries.
In contrast to process productivity, agility is a system attribute and requires system transformation. Also, agility is a top-line lever that acts in the market, not within the walls of a plant. For this reason, agility needs to be wrapped up with a strategy to grow market share and command a price premium on agility. The agility game is much more complex and bigger than today's spot I4.0 products suggest.
Since the I4.0 paradigm was first introduced in 2011 as a sort of technology-enabled manifesto for agility, flexibility, and resiliency, I4.0's real meaning and purpose are almost forgotten now due to a series of misunderstandings. Nowadays, in business and academic literature, I4.0 has latently regressed to an I3.0 state embellished with many fancy technology names. The alignment of technology with business goals is not even pronounced, let alone aiming for competitive advantage through digital transformation and technological disruption. Unfortunately, I4.0 is almost totally reduced to machine metrics and some spot use cases that can only be defined as an augmentation of I3.0 heritage.
All in all, I call this phenomenon `technology myopia`. If you do not have a transformation plan and a new competition strategy enabled by technology, you will likely suffer from `technology myopia`. In this article, I expose and explore `technology myopia` in a way helping business leaders ask the right questions and adopt the right perspective to avoid technology myopia.
How we came to this point?
Since the early 2000s, the manufacturing industry has been in need of a new strategy. The operations strategy of the time, outsourcing production to a low-cost country, seeking economies of scale, and focusing on lean principles, was not working as well as it used to. The main challenge was the global imbalance of consumption and production, which is still valid. Most of the consumption occurs in high-cost, high-wage countries, whereas most of the production occurs in low-cost, low-wage countries more than 5000 miles away from the point of sale, which imposes a lead time of more than eight weeks. Making the lead time problem worse, after decades of offshoring, the labor arbitrage opportunities have been marginal for a long time. In addition to the obsolescence of the old strategy, markets have new rules. The new dynamics of competition imposed new imperatives that the old operations strategy could not satisfy.
Every industry has its own speed that calls for a new operations strategy, but the trends are the same.
At the macro level, the world economy became more connected and dynamic. Globalization culminated in a world so interconnected that no crisis is local. Likewise, there is no local opportunity due to blurring lines among industries and borderless competition. On the other hand, the world is getting more and more eventful. Something important happens every day and triggers more. This dynamism adds another layer of complexity to the world economy. In turn, the new macro competitive reality is that companies have little time to adapt to changes and must be the world's fastest to seize opportunities.
At the political level, developed countries are increasingly aware of income inequality and the erosion of the middle-income segment. The loss of manufacturing jobs after a multi-decade-long offshoring trend is considered the likely culprit. Similarly, a new consumer sentiment that prefers domestically produced goods over imported ones is emerging globally. On the other hand, losing manufacturing capacity became a national security concern in countries like the USA, where the production capacity of strategic components such as microchips and active pharmaceutical ingredients has been lost. Finally, protectionism in general, particularly raising tariff walls, is another nail in the coffin of the old operations strategy.
At the market level, demand for every product and service is getting more volatile due to the higher frequency of competitive moves. The first line of battle is taking place with product launches. Product lifecycles are getting shorter as technology advances exponentially, and the technology of developing new products gets much more streamlined and automated. Additionally, more or less every product has its own fashion cycle, which is getting shorter every year. But the forefront of high-frequency competition is “sales'’. As companies gain better digital capabilities at revenue management and are better equipped to deploy price and promotion responses to each other's moves, 'sales' now resembles “fast chess.” Now, the FMCG industry competes in time buckets of hours, and online retail competes in time buckets of minutes.
At the customer level, digitalization increased the default customer expectations. Online retail, telecom, and fin-tech sector offering value propositions such as “at your fingertips,” “same-day delivery,” and “customize/personalize your product” raised customer expectations to the degree that most manufacturers cannot satisfy. Also, the competition now has more dimensions due to the proliferation of substitutes and fragmentation of value chains. This added more dimensions to customer expectations. Now, every product is expected to have an `app` with some digital ecosystem and complementing services.
In 2011, at the Hannover trade fair, `Industry 4.0` was introduced as a new operations strategy that was designed for the new market dynamics. At its core, Industry 4.0 is optimized for agility, flexibility, and resiliency based on autonomous self-organizing, self-optimizing decentralized systems efficient enough to render onshore production feasible. Technology is central to the Industry 4.0 paradigm. Because an overall efficiency boost is needed to offset the high input costs of a high-wage production context and address its demographic challenges. Also, I4.0 efficiency should offset increasing costs after re-designing supply networks for agility, which often requires a greater number of smaller sites with more proximity to the point of sales. The most important I4.0 lever is the “price premium” of agility, which always require a good marketing strategy and some I4.0-enabled business model innovation.
How can you overcome the technology myopia of Industry 4.0?
First, do your own research and try to understand the original Industry 4.0 paradigm. Understanding the holistic and fluid nature of real I4.0 will help you imagine new ways to leverage I4.0 for growth. Re-imagine your products and business model in light of what is possible and what will become possible with technology.
Second, identify I4.0-relevant market opportunities. Underserved or emerging segments are typically the easiest to aim for due to the lack of established entry barriers. However, the sweet spot for I4.0-driven growth resides in catering to chaotic demand patterns with customization requirements and very low batch sizes. Entering such segments is tough, let alone competing in them. So, there is an inherent entry barrier due to the difficulty of entering and operating in such segments. But do not assume this inherent entry barrier will protect you from the threat of new entrants for long. Make sure you formulate a good competitive strategy to skim the market effectively before entrants arrive. Your I4.0 machine should reach a robust scale and scope in these segments as fast as possible so that you can entrench and command a price premium as long as possible. But these segments are short-lived even, regardless of the threat of entrants. Be vigilant, identify new segments, and move on to the next segment. Repeat and excel at this cycle.
Third, formulate a real competitive strategy. Operational effectiveness is not a strategy, as Michael Porter explains in his 1996 article titled “What is Strategy.” So, I4.0 is not a strategy. Strategy is about creating and maintaining competitive advantage, which is ultimately relative and exogenous. To illustrate, shooting from high ground is advantageous, so it is a strategy. Whereas shooting rapidly and accurately is not a strategy, it is a competency, and in our analogy, it corresponds to I4.0. As I pointed out earlier, product and business model innovation is critical in complementing I4.0 with a real competitive advantage. Because digital transformation enables network effects, switching costs, and learning curve-driven advantages when the product is connected to operations and wrapped with an innovative business model. As a side note, it is important to remember that I4.0 is not intended for productivity in its origins; thus, think twice if you are tempted by cost leadership strategy.
One of the most powerful strategies is to focus on disruptive operating models. Disruptive operating models require a re-imagined enterprise architecture, business model, market positioning, and purposefully implemented technology. But the starting point is a wild imagination and thinking outside the box. In 2004, an article published in Harvard Business Review about Zara, one of the pioneers of disruption by agility, it was said:
"Zara defies most of the current conventional wisdom about how supply chains should be run. In fact, some of Zara’s practices may seem questionable, if not downright crazy, when taken individually. "
To me, it is tempting to share my universal method for disruptive innovation. But I do not want to bias you. Start with a blank slate. The minimum requirement from the third step is to define what type of supply chain capabilities are needed to enable your new competitive strategy. Some of the well-known I4.0-enabled supply chain capabilities are same-day delivery, mass-customization/personalization, direct selling model, negative working capital requirement via pre-paid sales, smart & connected products, ditching international trade intermediaries with smart contracts and producing countercyclical products under the same roof. You can parse supply chain capabilities from here to a `digital transformation vision` and then to “technology requirements.”
Now, you have the necessary awareness to go beyond technology myopia. But it is not over. Based on my management consulting experience, I want to depict two common pitfalls even those who overcame technology myopia tend to fall in. The first one relates to doing the wrong thing in the best possible way. I had automotive industry clients which were furiously devoted to I4.0 but for products that will vanish soon, such as fuel pipes, exhaust systems, and valve trains. When asked in these companies, executives acknowledge that their products will eventually vanish. Although the time horizon is known to be barely enough to pivot to a new segment successfully, complacency and decision avoidance prevail under the cloak of a fancy I4.0 strategy. The second pitfall relates to solving the easiest problem with the most expensive toolset. Most of the greenfield factories, decorated with the best machines and armed with cutting-edge I4.0 technology, are assigned to the most stable demand segments. Also, the investment is usually justified with footprint consolidation. Both decisions defy the idea of I4.0 since I4.0 works best with decentralization and is advantageous in chaotic demand segments.
Finally, markets will certainly continue to evolve, impose new operational necessities and shuffle the order of competitive forces. Also, technology will always be the first resort to enable the operations machine to align with new market trends and competitive forces. I believe this is already happening as global warming and the sustainability of natural resources has obviously become a systemic threat to our planet. Despite this, the systemic threat has not yet become a dominant factor in customer choices, and while political frameworks are still lagging, corporations must adopt responsibility and lead the market. Additionally, the Covid-19 pandemic pushed many people to the next level of environmental awareness and make them question their consumption habits and the value of owning things, which might be the bottom wave of a de-consumerism and green consumption trend that might usurp agility.
The call for imagination
Today, we live in a 150 trillion USD world economy with a record low cost of capital at a time when many new technologies are just started to take off. Thus, top-line focus offers much higher marginal returns than bottom-line focus. This is not only the business case for I4.0 but also for a call for imagination.
Be vigilant, and see the big picture.
Saip Eren Yilmaz
Originally published in ISE Magazine in September 2020
