Strategy Musings: How firms innovate to survive and grow, and the difference operations makes

Christensen’s theory of modes of innovation and the possible roles operations plays therein

Clayton Christensen’s pathbreaking theories of innovation provide a robust explanation of the strategic actions firms take to survive, improve, innovate and grow, and how competitors respond to them. Here we take a brief look at those strategies/actions and the possible roles operations plays to make them effective.

Christensen talks about four modes of innovation, or different ways by which firms compete to survive and grow, and how competitors respond to them. The ways are — ‘potential innovations’, ‘efficiency innovations’, ‘sustaining innovations’, and ‘disruptive (or market creating) innovations’. Traditional thinking tells us that it is primarily in efficiency innovations that operations has a major role to contribute. However, an evolved view of operations that includes not only the production, logistics and back-office service processes, but also the customer-facing (or front-office) service processes, allows us to transcend conventional boundaries and appreciate the possible ways in which operations contributes to sustaining innovations and, even (to a limited extent) to disruptive innovations.

Efficiency Innovations

Role of operations here is easy to understand.

Efficiency innovations enable firms to do more with less. They are, by and large, process or technology innovations in various operations that increase productivity. That is, they make those operations consume less inputs (of labour, materials and capital) for every unit of output. Most of these innovations are, therefore, operations improvements.

For example, improvements in work methods and processes, such as standardization and simplification of operating procedures at specific work steps or reconfiguration and simplification of an entire process (i.e. a set of multiple steps). The impact of such standardization and simplification could be major, such as Ford’s mass production process. Or it could be minor, as in the routine incremental improvements in worker productivity in a plant, a warehouse, a service back-office or a service front-office by ways of streamlining work flows and resource layouts.

Automation of work is another example that often improves efficiency of using materials and labour, besides increasing rate of output. For instance, automation of a production operation such as use of robots in welding body parts of an automobile. Or, automation of a service operation, such as use of computers and digital technology in a back-office operation like processing insurance applications for verification and approval, or in a front-office operation like passenger check-in process by an airline. Allowing passengers to do self-check-in through smartphone app or browser from their homes and on machine kiosks at airports are examples of a combination of automation and process reconfiguration.

Scale is another way of increasing efficiency. Walmart is an example of efficiency innovation through a combination of scale, process change and automation.

Efficiency innovations bring two major benefits. One, they help firms survive by becoming more cost (and price) competitive — something that’s useful in mass markets. Two, they release more cash from operations chain — something that finance managers, business owners and top management relish. This cash could be reinvested in further improvement projects and other initiatives.

Sustaining Innovations

Sustaining innovations help firms introduce better products for their best customers — products with new or improved design features, better quality, better serviceability, etc. Operations and supply chain contributes to some of these dimensions, though not all.

For example, better quality could be achieved by tighter process quality control in procurement, production and logistics. The automobiles firms and their suppliers have achieved consistently high levels of quality by deploying process control methods, as have many other industries. Service firms in industries such as banks and other financial services, after sales services, BPO/KPO services, logistics and others use process control and six sigma techniques to improve service quality as well.

Well-performing firms that design their products and services try to improve conformance quality by aligning designing process with requirements of operations such as own-production, supplier level production, logistics, sales and after sales. For example, one of the reasons Toyota, Honda and some other automobile firms from Japan posed competitive threat to leading automobiles firms in the USA and Europe in the western markets was exceptionally high conformance quality (besides competitive prices) they offered. Integrated design approaches contributed to superior conformance quality of products that came out of their operations.

Consumer goods firms such as those in retail and FMCG industries compete on customer service dimensions like availability of products at retail ends (through metrics like fill rate, OTIF, stockouts and lost sales). Setting up channel partners, efficient distribution logistics and inventory management systems play crucial role in assuring high service levels to retailers and consumers.

Firms selling products with short shelf life, such as fresh food products and fashion goods, rely on building agile supply chain and operations to run near-pull based and lean systems. Low inventory and high quality control are at the heart of such systems. Some firms, such as Toyota, choose to do so as a strategy.

Sustaining innovations help firms compete in higher end markets by differentiating on one or more dimensions of performance that matter to those customers (who are willing to pay for them), such as new product/service designs, quality, speed, and customer service. This is how performance of products and services improves over time. While ‘jobs to be done’ approach could help identify opportunities for enhancing specific performance dimensions of products/services that would serve customers better, operations and process interventions could contribute to enhancing some of those dimensions.

Potential Innovations

Potential innovations give birth to new industries. They are about entrepreneurial ingenuity and creativity in identifying new market opportunities and designing radically new products and services. Operations have a limited role here. Only indirectly, ‘operations perspective’ might allow an entrepreneur to take a comprehensive ‘process view’ of the ‘jobs to be done’ by prospective users, and therefore, equip them to identify new market opportunities.

Disruptive Innovations

Disruptive innovations create new markets for existing products and services by making them affordable, accessible and simple-to-purchase-and-use for many new customers (especially the cost-conscious customers). Thus, as Christensen says, they compete with non-consumption and, therefore, drive growth. Since the incumbent, higher end players have greater interest in higher-margin market segments and have business models suited for those higher-end segments, they are likely to ignore the entrepreneurs who enter at lower ends of the markets. Thus, they provide sufficient time for the latter to grow and improve on other dimensions such as design, variety, quality, speed and customer service, and compete in higher-end segments as well. Eventually, the incumbents get disrupted.

What matters here are creative skills of identifying these ‘jobs to be done’ market opportunities (among non-consuming, price sensitive customers), developing new business models, and adapting technology and modifying designs of products/services to make them simpler and affordable. In addition, simplifying and standardizing new processes of deploying and delivering those products/services and of customer support services as part of new business models, matter as well. It is in these latter activities that operations could play a significant role.