Frank Piller, a professor at Aachen University and co-director of the Institute for Technology and Innovation Management, answers the questions of leading executives across Fortune 2000 companies on seizing new business model opportunities and business recovery post-Corona.
Q: Which new top management capabilities and mental models need to emerge to frame and seize the new business model opportunities?
It's a complex question, and a very important one. Let’s start with the mental models of top executives, which is a key point. We did a couple of large-scale research initiatives at RWTH Aachen, looking at what we call ‘managerial sense-making organisations’. We wanted to see how far companies were going forward with digital transformations. One study was done in regard to digital manufacturing and additive manufacturing, and the other we are currently doing is in regard to the use of artificial intelligence in manufacturing.
What we realised is that those companies that succeeded had both bottom-up and top-down sense-making. They had something in place where middle-management and operators, the people really doing the work, were able to make sense of these technologies. Yet at the same time, management all the way up to the top level were also doing the same. In Germany, this is a big challenge as most boards of manufacturing companies are composed of engineers: Mechanical engineers, aerospace engineers, but no computer scientists. Due to this, the skills required to work with digital matters like artificial intelligence are often lacking. Therefore I think a good starting point is educating your top managers. This is really difficult as they have to learn more and build these skills from their own insights.
Then, breaking these mental models down into KPIs is often rather, well, I wouldn’t say straight-forward, but things usually work much easier if you first build this common mental model and then come up with the KPIs. This is preferred over what I see in many companies, where they say “Okay, here are our KPIs. Now how do we digitally enable these?”
Q: How can organisations manage the perceived conflict with the traditional ways of measuring performance - mostly efficiency-centred metrics - vs new metrics addressing agility and resilience?
This question builds nicely on my last answer. Very often, especially with manufacturing equipment, we operate plants as profit centres and we give these plants objectives of operational efficiency: cost-saving, quality standards, etc. Yes, this is very important, however, we should be more ambitious here.
We have to acknowledge that if we give a plan a really strategic differentiation target like the ability for customisation, or agility in regards to production volume, then perhaps they will lose some of their operational efficiency. Achieving this level of ambidexterity is very difficult, so we have to work in stages. Many companies today are forced to focus on lean, on cost-saving, on efficiency. But once that is done and the efficiency has been improved, you may realise that you have cut functions out of your business that were not immediately productive. At some point, you have to stop this, and this is when we get to the strategic differentiation objectives.
Q: How can a strategy be developed for old-economy companies that need to change as they move into the post-coronavirus economy?
A big, big question. You need a top-down strategy and defined strategic objectives. A common understanding and ambition in your top-level management are necessary, but the real innovation of how to reach these objectives comes from the bottom-up. An example of this bottom-up experimentation has been seen at Siemens.
Siemens is a very sophisticated company that just about everyone has been a customer of. They have many solutions for smart manufacturing such as software suites and automation technology. In one of the plants, where I believe they produce electric motors, a workstation leader had some budget left over at the end of the year and he gifted his team a co-bot for Christmas. He said to them “Well, I had surplus money so here is a co-bot. And here is an iPad so you can program the co-bot to do whatever you like.” One year later, the co-bot was part of the production line. Before this, there was resistance to integrating co-bots and similar technologies into the supply chain due to fears of automation and job implications. All it took was some experimentation and innovation at the bottom level of the organisation with factory employees.
Similar things have been seen at Triumph, another highly sophisticated company that manufactures machinery here in Germany. They had a community of motivated engineers that used their own private time to go onto Cousera, a platform for online training, and all take the same classes on artificial intelligence. Then they formed a learning group and used their new skills to carry out successful predictive maintenance using existing data in new ways.
Another example was also observed with quality inspection tools at another Siemens plant. What I’m saying here is that an enabled freedom to experiment at the bottom level is a powerful method of encouraging innovation and change within your business.
However, this is an extremely complex question to answer and in our smart-factory masterclass, we would discuss this for easily more than half a day! We never come to an end on these matters, so these were just some ideas here.
Q: How do you view the future of contract manufacturing post-coronavirus? More open, or more securing of internal manufacturing capabilities by the product owning companies?
This is a very interesting and difficult question, and it’s hard to know the precise answer. There are two ways to achieve resilience. The first is to vertically integrate, and we have recently seen companies announcing that they do not want to be quite so dependent on suppliers and contract manufacturers anymore and would rather find ways to in-source these needs. However, vertical integration comes at the cost of complexity. This is why, in the past, we had contract manufacturers relying on supply chain networks.
But for those companies that want to build resilience whilst still using their suppliers and partners, we believe that their partnerships will become much stronger. We don’t think that contract manufacturers will be “auctioned off” to whoever has the best conditions, but instead that companies will go back to the old idea of making long-term investments into strategic partnerships. We predict that companies that rely on contract manufacturers should really try and gain a better understanding of what the contract manufacturer is doing and invest more in becoming a preferred customer also.
Q: This applies very well to developed countries, but what about countries currently developing? What opportunities do they have?
Another great question, and actually I have a couple of papers that I can share with anyone who gets in touch via The Leadership Network portal from a colleague within our group who looks at Industry 4.0 and digital manufacturing in Africa. I am not an expert in this field, however, what I have learned from my colleague and their observations is that you can really leapfrog. An example of this in the past would be how many companies in the telecommunications industry completely bypassed fixed telephone line technology and immediately went to mobile phones, bringing new business models and applications with them. Digital manufacturing, such as additive manufacturing and 3D printing, and the philosophy behind it are able to be perfectly utilised.
And here’s another thought. We know in innovation management there is the idea of frugal innovation. In big countries like India, it has been shown that you can innovate with just a fraction of the development cost that we, in more developed countries, think is required for such endeavours. They are then able to deploy these innovations at a fraction of the manufacturing cost we would usually expect also - this has been seen in medical innovations and automobile companies like Tata. Perhaps frugal manufacturing is something that companies in developing countries could make use of. And while we help out developing countries with these innovations, we in more developed countries could learn something from the frugal methods used in countries such as India. I foresee a major interest in what is going on in regard to manufacturing in the developing world, and usually what comes along with interest is further knowledge transfer and investments.
Q: Could the flexibility together with product ownership shift the balance for contract manufacturers versus internal manufacturers?
If I have a contract manufacturer that is really advanced and is operating distributed local manufacturing, then this could be a big driver. In the additive manufacturing world, when additive manufacturing technology first popped up around 2000, people were owning 3D printers. However, very quickly there evolved a business model for what became known as service bureaus: operators of 3D printing equipment for others. Nowadays, if you are a big company you will still buy some additive manufacturing devices. But in this industry, different layers of operators of additive manufacturing equipment have formed. Big guys like i.materialise immediately come to mind. i.materialise has the largest amount of 3D printers to my knowledge, whether it be using metal or other materials. But they also are a major software organisation. They don’t just print the files for customers, they also enable them to create and optimise better designs using enhanced services and software. i.materialise is a typical example of a contract manufacturer, but one with very enhanced features and services. And actually they are a perfect example as they operate exactly the same manufacturing capabilities for their big industrial clients as they do for their smaller customers like me. For them, it’s a very efficient fulfilment model because it’s all the same. Due to this, they have a far, far larger market size and customer base than they could ever have had before these factors.
Then there are business models like 3D Hubs, who connect thousands of local 3D printers that are in smaller facilities and offices like my own! Opening this kind of manufacturing capacity creates one of the biggest open manufacturing networks we’ve seen.
There is so much we can learn from the additive manufacturing industry and these contract manufacturing business models. Another industry is digital 2D printing. These are industries that are far ahead in terms of implementing Industry 4.0 solutions, at least in comparison to textile manufacturing and electronics manufacturing.
For more insight on the future of digital business models in the post-pandemic world, read Frank's latest research paper here.