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Chapter 1
Lean Product-Process Innovation and Long-Term Thinking
We often underestimate the impact that innovation in the products or services we provide to our customers has on the long-term prosperity of any business. In fact, no amount of operational excellence will compensate for a poorly designed and thought through value offering to the customer. We are simply putting a well-made and executed, but unappealing or unuseful, product or service up for sale. This chapter discusses the links between innovation, product development, and business strategy. When companies focus on the beating heart of their business, that is, the set of products and services they offer, they are better able to devote their scarce resources to the things that can really make a difference to their customers. Through the years of the Great Recession and its aftermath, too many companies saw their only way to survival as cost reduction often gutting the innovation engine that was the key to their future. What those that could afford it should have been doing is using the downtime to apply the principles of Lean thinking to the development and innovation process to have a true competitive advantage when the dust settled and the economy began to recover.
1.1 A Strategic Question: Excellence in the Long-Term or Mediocrity in the Short-Term?
He that does not foresee things in the distant future, exposes himself to unhappiness in the near future.
Confucius
Is it possible to generate profits and prosper over a long time, in todayâs capitalist world, by setting targets that are not exclusively short-term âfor profitâ targets?
If we look at what great companies have been able to do, we realize that not only is it possible, but also that it is the only way to guarantee success in the long run.
For high-performing companies, the long-term strategies and their competitive advantages acquired over time always seem to take priority over short-term gains. These companies are inspired by the dreams of their visionary leaders. Companies that come to mind include Google, Apple, Microsoft, Walt Disney, and Cirque du Soleil. In Italy, we can point out to Luxottica, Diesel, Ferrari, and Lamborghini.
In the book The Toyota Way by Jeffrey Liker, we discover that the first of the fourteen management principles that enabled Toyota to produce the industrial miracle it is today is precisely this: the actions that lead to greater long-term benefits should always be placed before those that yield modest short-term gains. 1
The Japanese giant has shown how it is possible to align the goals of nearly 250,000 people to something greater than simply âmaking a quick buck this quarter.â Their strategic mission is to create value for the customer, society, and the economy through their products and services. Irrespective of the many fine words, it is amazing to witness the commitment of their people to this strategic objective, translated into everyday activities aimed at increasing the value of their products and the relentless effort to eliminate waste. The deep and tangible conviction is that, without a doubt, by living this principle it is possible to achieve higher profits over time.
Sometimes we are asked: Why havenât American companies replicated Toyotaâs successes, in spite of being familiar with their model since the 1980s? General Motors had a chance to experience it firsthand starting in 1984 when they launched a fifty-fifty joint venture with Toyota in California called NUMMI.
In fact, this is a paradox, because it is essentially thanks to American and British scholars like Jim Womack and Daniel Jones, who were funded by American companies to study the Toyota model and disseminate knowledge of it,2 that we came to know the Toyota model.
It was not the Toyota people who were marketing themselves, but in fact the Americans and the British who gave the best possible visibility and promotion of the Lean model that, since the fifties, has revolutionized their way of doing business, teaching the world to achieve more with far fewer resources. Theoretically, the Americans should have known exactly what to do to achieve the same benefits, but one of the things that led the major American automakers to the brink of (or actual) bankruptcy was their inability to break away from short-term thinking. For example, it is interesting that General Motors originally viewed NUMMI as having two purposes: One was to learn how to make small, fuel-efficient cars profitably (which at the time they were unable to do) and the other was to learn the Toyota Production System (TPS). In reality, they simply used NUMMI as a way to get Toyota to run a plant that could build small cars profitably with GM nameplates on them. Almost nothing about TPS was learned by GM and they did not learn much about developing and making profitable small cars by simply letting Toyota do it. The short-term benefit of the profitable, high-quality cars coming out of the plant seemed enough for GM, while Toyota intensely was studying and learning how to bring TPS to American culture so they could spread this know-how as they launched new overseas plants over the coming decades.
In most publicly traded companies, senior positions are typically filled by people motivated to focus on quarterly financial statements to show âgains,â often from outside the company or even the industry. Success equates to satisfying shareholders. The focus on âquick winsâ and a high degree of personnel rotation were clearly some of the contributors that led to a genuine long-term strategic dysfunction for those companies and it shows in the lengthy development of new products that are of little interest to customers.
Toyotaâs rise to prominence clearly shows how the value of a company can grow significantly over time, with a clear long-term strategic vision that drives daily activities. But, as we shall see, Toyota is not the only one. For these long-term thinking companies, when it comes to innovation and product development, we are referring to business strategies and not just tactics, as happens in many companies. These organizations prefer to spend more on product development and design, rather than resorting to having to spend hundreds of thousands of dollars in post-production fixes and âenhancementsâ after the fact.
Deciding to invest in better products and taking preventative measures from the beginning is a cultural trait of innovative Lean companies. Before techniques, even before the methods, the culture plays a crucial role in the way that a company approaches innovation. Focusing solely on short-term results can literally shift the future destiny of both companies and individuals. Lean innovators make a great effort to evaluate the real long-term impact of what they choose to do: the real risks to be taken, the real costs (short- and long-term) to bear, and the true benefits that will result for their customers and ultimately their bottom line.
In a 2006 article in the Harvard Business Review, Edmund Phelps3 argues that the rate of innovation in Western companies, starting with those in the U.S., was on a path to dangerously low levels. Among the main causes of this according to Phelps is the lack of a strategic long-term vision. This lack of strategic vision from senior management and entrepreneurs is attributed to the increasing pressure from financial markets (institutional investors and security analysts) to constantly surpass profit quarterly growth goals. This is reinforced by âdeviantâ compensation mechanisms, such as large quantities of stock options, which tend to reward managers on the basis of the results obtained in relatively short time spans. The resulting shift toward the achievement of short-term goals results in important consequences that seriously affect business management. Companies decide, for example, on drastic reductions in spending on R & D, and do not invest in training and people development. The tendency is to overlook a whole series of key activities that will be fruitful well beyond the short-to-medium term. According to Phelps, failure to invest in innovation in the long run will deprive the U.S. economy of one of its key success factors, namely the ability of entrepreneurs to build new businesses, develop new products, create new markets, and establish themselves in new market niches. Phelps also points out that innovation cannot be created artificially, from the top down, or by central public organizations. Innovation comes from the bottom, stemming necessarily from a passion for the product, from the desire to realize ideas and the desire to make ârealâ money.4
It is not all dire news, as there are illuminating examples of companies doing the exact opposite including Apple, Harley-Davidson with its timeless motorcycle, and Schlumberger, the largest oil services company in the world. All these companies in diverse industries have something in common: they are making some far-sighted choices by maintaining or, in some cases, even increasing investment in product innovation and in R & D, instead of stopping and slowing everything, frightened by the winds of crisis. Even Boeing with all of its self-inflicted crises in the development and launch of its revolutionary Dreamliner has orders into the future far beyond production capacity that will help set the company up for long-term success.
It is in product development and innovation management where the real key to the long-term success of a company is hidden. Innovation can be the result of being truly strong or simply playing hard. Imagine two boxers in the ring. One boxer lands his blows in a powerful and precise way, while the other one, flustered, thrashes around, lashing out with frequent, poorly aimed punches. Who is likely to win the match?
This is exactly what happens every day in business!
1.2 Innovating to Achieve Success
If Iâd asked customers what they wanted, they would have said a faster horse.
Henry Ford
For any business today, it is impossible to survive in the marketplace without continuously innovating products and services. Everything we produce will sooner or later be made by someone else at a lower cost and probably of the same or better quality. This âruleâ is now true in virtually every industry. The meaning of innovation is commonly understood as something extraordinary, outside the scope of what we encounter daily. Generally, it is something that has a long gestation period, typically within a few groups of dedicated people, before it sees the light of day. This is certainly a type of innovation, but isnât the innovation required to create the next-generation iPhoneâmaking it faster, lighter, with a better camera, and a higher resolution screen? In Toyota, they say the two products that take the highest level of engineering is the newest Lexus which always requires some breakthrough technology that has not been in a vehicle before and the Corolla which requires packaging more features into a lighter weight vehicle at a low cost.
If we analyze what leads companies to continually bring to market new products that build market share we find that it is impossible to separate the innovative process from the people and culture of the company. In fact, th...
