Disruptive Innovation



6 June 2013




Creative Destruction




Innovation, especially as that term applies to products, manufacturing and the economic environment, has been a frequent theme in this blog. Successful innovation produces competitive advantage for the innovator. Simultaneously, that innovation disrupts the status quo, placing affected incumbents at a competitive disadvantage. Austrian – American economist Joseph Schumpeter described this process of Creative Destruction as an intrinsic industrial evolutionary process: [1]




Capitalism […] is by nature a form or method of economic change and not only never is but never can be stationary. […] The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. […] The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation […] that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.


 


So, manufacturers need be aware of both aspects of innovation — the competitive advantage the innovator gains and the competitive disadvantage the incumbent is saddled with. The rapid pace and global scope of business today means that manufacturers have to be concerned not only with innovating, but also with the prospect of others innovating anywhere within the value stream.




To illustrate how broad this scope of concern is, consider this example: U.S. producers of polyethylene resins suddenly enjoy a significant advantage over polyethylene producers elsewhere in the world. Why? Because most polyethylene producers elsewhere are ultimately supplied by petroleum refineries, while many U.S. producers are ultimately supplied from natural gas liquids. Due to natural gas production by the innovative “fracking” process, the price of natural gas (and natural gas liquids) has been uncoupled from that of products derived from petroleum (crude oil). U.S. polyethylene producers are the beneficiaries of innovation far upstream in their value chain.




Of Icebergs and Time Bombs




McKinsey & Company, a big company consultancy, recently published Disruptive Technologies: Advances that will transform life, businesses and the global economy, [2] a study that sought to identify twelve innovative technologies of global significance, and to quantify the possible economic impacts of these technologies. All twelve provide worthy examples for learning to identify potential sources of innovation (and disruption). I have chosen two of the twelve for further discussion. These two appear to me to be particularly relevant to smaller manufacturers:  




>> Internet of Things
— The McKinsey study defines the Internet of Things as: “… the use of sensors, actuators and data communications devices built into physical objects — from roadways to pacemakers — that enable those objects to be tracked, coordinated or controlled across a data network or the internet.” Applications include remote meter reading for utilities and the much ballyhooed electric power distribution “smart grid”. Since that which gets measured and controlled operates more efficiently, there are many obvious manufacturing applications, and many more that are less obvious.




The variety of available and inexpensive sensing and actuating devices is increasing rapidly. In 2012, the number of such devices passed 9 billion, expected to increase many times over within this decade. The global economic impact of this is expected to range from $2.7T to $6.2T (right — “T”, meaning Trillion) annually by 2025, with about 70% of that to accrue to developed nations.




For an introduction to the Internet of Things and its applications, you might try David Stephenson’s SmartStuff: An Introduction to the Internet of Things, an e-book available in Kindle format.




>> 3D Printing
— Sometimes innovation occurs through the conjunction of two or more earlier innovations. Additive manufacturing — 3D printing — results from marrying ink jet printing technology with digital design tools (like AutoCAD). Design a part, create a digital file, then print that part in three dimensions, layer upon layer, using polymeric or metallic materials (or almost anything else that can be made to flow) instead of ink. Finished parts result, without molding, machining or fabrication. This includes complex parts that are difficult to produce otherwise.



Three-dimensional printing makes it as cheap to create single items as it is to produce thousands and thus undermines economies of scale. It may have as profound an impact on the world as the coming of the factory did…. Just as nobody could have predicted the impact of the steam engine in 1750—or the printing press in 1450, or the transistor in 1950—it is impossible to foresee the long-term impact of 3D printing. But the technology is coming, and it is likely to disrupt every field it touches.


The Economist, 10 February 2011 [3]



The potential applications for this technology are almost endless. Make prototypes. Make your own replacement parts. Make molds. Or, like General Electric, make turbine components for jet aircraft engines.


The McKinsey report projects global economic impact of $200B – $600B annually by 2025, about 60% of which will occur in developed countries. However, I agree with The Economist:  the long-term impact is impossible to reliably foresee. This emerging technology has received a lot of hype in the media. Googling “3D Printing” will provide lots of reading material, ranging from fascinating to fatuous. Happily, you can buy a small 3D printer today for $1,000 or less and use it to learn about this process and its possibilities.




Looking Forward




The point here is that innovation has become a primary vehicle for differentiation. In a global economy, the number of sources for potentially disruptive innovative ideas is rapidly growing. Since your firm can be on either the creative or the disruptive side of any given innovation, it is increasingly necessary to develop “radar” — a way to keep you aware of potential disruptions that enter your “economic airspace”.



Chuck - Mt. Wilson
Thoughtful comments and experience reports are always appreciated.




…  Chuck Harrington
(Chuck@JeraSustainableDevelopment.com)




P.S
: Contact me when your organization is serious about pursuing Sustainability … CH




This blog and associated website (
www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.









[1]
From Schumpeter’s Capitalism, Socialism and Democracy, quoted in the Wikipedia wiki on creative destruction: http://en.wikipedia.org/wiki/Creative_destruction





[2]
Disruptive Technologies: Advances that will transform life, business and the global economy, James Manyika et al (May 2013) is available for free download from the McKinsey Global Institute website:  http://www.mckinsey.com/insights/business_technology/disruptive_technologies





[3]
The Economist, 10 February 2011 issue, as quoted in the Wikipedia wiki on 3D printing, http://en.wikipedia.org/wiki/3D_printing