In case you missed it!
(Originally published by PandoDaily on January 19, 2013)
Whether you are a government entity attempting to grow a startup ecosystem, a university trying to commercialize technology, a big business intent on reinvigorating (or saving) your business, or an entrepreneur seeking to change the world, you’re likely using old-school, 20th-century “innovation” methods in a new, unrecognizable, global economy. In other words, you employ investors, consultants, professors, C-level executives, enterprise board members, and other luminaries who have an impressive track record of crushing it.
Good luck with that.
The last century economy was born out of the industrial revolution, which was enabled in no small degree by the concept of “specialization of trade.” Companies were organized around what is known as “batch-mode production,” dividing production into discrete stages or cells. You probably read about this in Adam Smith’s “The Wealth of Nations,” in his example of the pin factory, when he showed how specialization boosts human productivity.
If you did, you learned that it is far more efficient and profitable than assembling an entire product one unit at a time. But it took Henry Ford – and the introduction of the factory assembly line – to take the concept to a higher plane. Here’s how he explained it in his autobiography, “My Life and Work”:
With one workman doing a complete job he could turn out from thirty-five to forty pieces in a nine-hour day, or about twenty minutes to an assembly. What he did alone was then spread into twenty-nine operations; that cut down the assembly time to thirteen minutes, ten seconds.
Ford applied the same philosophy to the entire automobile assembly as well as parts manufacturing. He did it for efficiency’s sake, to trim waste, speed up production time and manufacture cars at lower cost while maintaining quality. He recognized that his advantage over the competition was in continuously improving the manufacturing process, not continuously improving the car itself. Ford’s assembly line, while not “The Toyota Way,” represents the same “flow” ethos as and clearly is the predecessor to “lean manufacturing.”
Critical to this story is that Ford was determined to build one model, the Model T. It took eight models and five years to achieve Ford’s “universal” car. Defying all industrial best practices, Ford announced in 1909: “In the future we were going to build only one model, that the model was going to be ‘Model T,’ and that the chassis would be exactly the same for all cars, and I remarked: ‘Any customer can have a car painted any color that he wants so long as it is black.’”
While this process is not going away, it is decidedly last century. The world of one car, one model, one color is long gone. Products tend toward increased complexity and a wider range of options and customized designs. Ford’s car had 5,000 parts, including nuts and bolts. The main manufacturing facility had 500 departments. Today’s cars have more than 30,000 separate components. Car companies have multiple product lines, each having numerous models and each model offering different options.
Fast growth in new markets can hide many business model problems. As Ford the company grew by leaps and bounds, speed of execution was the primary issue to overcome and Henry Ford’s relentless focus on improving his assembly provided that. But in a more mature market with lots of competition, changing consumer expectations, and economic ups and downs, batch mode processing became wasteful.
All those departments very efficiently built up inventory whether needed or not. Materials, labor, space, and energy go into creating parts for which there is no immediate demand, with the assumption of future demand. Office organization followed suit. Where the production of one product requires a simple collection of marketing, selling, fulfillment, order processing and such, multiple lines times multiple models requires a lot of each function. The modern day corporate silos grew out of the natural inclination of grouping like functions in order to maximize resource utilization. Better to have a marketing copy department where resource employment and allocation can be managed based on number of products.
Naturally, someone needs to manage all these departments and manage the managers. The result is often an innovation-stifling hierarchy. Ford recognized this, too:
If a straw boss wants to say something to the general superintendent, his message has to go through the sub-foreman, the foreman, the department head, and all the assistant superintendents, before, in the course of time, it reaches the general superintendent. Probably by that time what he wanted to talk about is already history.
Departments are measured on output efficiency. When demand is high, output efficiency is a pretty good barometer for company success. But measuring departments output efficiency across a number of products with fluctuating demand is a poor measure of business success. Departmental output, whether that be marketing brochures or flywheels only is indicative of success if cars are flying off the lots. In other words, are they keeping up with demand?
Such organizations are optimized for sustaining innovation. In others, they create new, improved products for existing markets. Managers and executives are adept at forecasting demand for raw materials, output, expenditures and revenues, because the future in these markets is predictable, as long as next year is similar to this year. They can’t create disruptive innovation – ie come up with anything completely new – because such markets are unknown, not measurable and not predictable.
Arguing for the flow of the assembly line, Ford demonstrated that more products could be produced at better quality level and reduced cost than the craftsman methods that preceded him.
Lean manufacturing changed that with the concept of “pull,” which dictates that a department only produces output when the downstream process demands it, all the way through to the customer order. In many cases, pull plus flow improves products, increases efficiency and reduces cost, by aligning activities with demand.
Fast-forward to emerging digital fabrication technology and you have a manufacturing process combines the uniqueness and customizable nature of the craftsman with the speed and efficiency of lean manufacturing. What does the auto industry look like with crowdsourced car designs, 3D printers that print physical goods exactly when the product is demanded, and open source, interchangeable auto parts?
Organizational structures must adapt. Businesses that can only muster sustaining innovation are in a race to the bottom, their products destined for the commodity bin.
Economies that prop up old-school practices will not succeed long term. Supporting startups is the right way to create job growth, but if we treat startups like small versions of big companies, they are doomed as well.
Top-down, hierarchical thinking that describes big business management practices is not suitable for a startup’s ecosystem: The highest-paid person doesn’t predict the future any better than anyone else. The one with the money doesn’t know best. Venture capitalists can’t pick winners out of a crowd. Startup founders are not visionaries.
Businesses must become fast and agile with decentralized control, able to make decisions on value creation on the fly. They must be close to customers, not in order to do what they say, but to understand them deeply. They must be experimental, continuously improving the processes of product creation. They must measure business functions in a way that reflects actual company performance and provides information that can be acted upon.
Above all, they should look back at Henry Ford so they can see the road ahead.
While in the single-output case, economies of scale are a
sufficient condition for the verification of a natural monopoly ,
in the multi-output case, they are neither necessary nor
sufficient. Economies of scope are, however, a necessary
condition.