Innovation leads to dematurity of mature industries
Much of the current emphasis on innovation seems to concentrate on new sectors capable of bringing about significant social and economic change, from mobile telephony to digital technology. As a result, sectors that could be classified as mature and which are seen as generating little in terms of innovation are given scant regard.
No one doubts that innovation is vital not only to businesses but also to national economies. Innovation provides a competitive edge in both today’s markets and those of the future, yet success is often more readily seen when the impact is novel (take smartphone technology). So where does that leave innovation in mature industries whose products were in greatest demand 20 or 30 years earlier? Additionally, what is the significance of innovation in these industries and, indeed, is innovation really worth pursuing when growth prospects may be deemed to be few and far between?
If the process of innovation is intrinsic to current economic activities, and given that the majority of companies (globally) are operating in what can be classified as mature industries, then innovation in this sector is certainly of some significance. Is it worth pursuing? The answer may be an obvious ‘yes’ but it depends on a number of factors, not the least of which are historical legacies, industry trends, government and environmental policies and customer and competitor behaviour.
Two sectors, automotive and energy, are excellent illustrations of where companies in mature industries have decided to aggressively pursue innovation as a means of driving top line growth. Whilst environmental factors contribute greatly to this need for innovation, it is often a single company or small group of companies that ‘jumpstarts’ an entire industry.
Tesla Motors is a good example. Although it was not the first to introduce an electric vehicle (Thomas Parker built the first practical production electric car in London in 1884, using his own specially designed high-capacity rechargeable batteries), nonetheless it is Tesla that has begun to demature the automotive sector and push it towards a future that is more sustainable.
Whilst the advance may be slow as motor vehicle company executives, policymakers and consumers ponder whether electric vehicles are a cost-effective replacement for the conventional petrol/diesel-powered internal combustion engine vehicles, the transformation has begun. Some industry analysts believe that within the next 40 years, most vehicles being driven on our roads will be electric.
This dematuring of the automotive industry is not the first time it has happened, and it is not uncommon for industries to mature and demature, then go through the whole process again. In the US, it took the arrival of the Japanese in the late 1950s to demature an industry that was based almost exclusively in one city; Detroit.
Until Toyota and Datsun arrived on the scene, American vehicle manufactures struggled to differentiate themselves other than by price. This is one of the hallmarks of a mature industry; markets become saturated and demand is either static or declines, margins and profits start eroding and this results in an emphasis on cost-cutting and discounting to stay afloat.
The development of effective and affordable electric vehicles, in addition to the rapidly expanding vehicle recharging infrastructure, is transforming virtually every aspect of the mature automotive world.
Usually, dematuring is not the exclusive domain of one industry on its own. Others closely associated with that industry will also being affected. For example, with the dematuring of the motor vehicle sector, the tyre industry is also undergoing some changes. The Goodyear Tire & Rubber Company announced it was developing a tyre specifically to fulfil the distinctive requirements of future electric vehicles.
Within the energy sector, it is obvious to all that the exploitation of fossil fuels has, despite the current shale gas/fracking boom, a limited shelf life. How the behemoths of the oil industry address the issue over the next few years will define the longevity of those companies. Those who do not embrace and lead the search for alternative energy solutions can expect a long term decline into oblivion.
Situations like this open up considerable opportunities for company executives, provided they are awake to them. All too often, however, management and boards become preoccupied with appeasing shareholders and the market by concentrating on short-term objectives.
The case of IBM and the advent of PCs illustrates this point. When Apple and others stole the march on Big Blue, it was not because IBM was unaware of this developing market, but because its priorities lay with providing its large corporate clients with mainframe systems that returned substantial profits. Essentially, IBM executives saw the computer industry as hardware-driven whereas companies like Microsoft saw that the future lay in software. More importantly, they saw that there would be a significant diminution on earnings should they make the change. However, it is to their credit, that, having stared into the abyss, IBM reconfigured and reinvented itself as technology and consulting company.
Senior executives of companies operating in mature markets need to ensure they don’t take their eyes off the ball. It’s one thing to continue operating profitably by milking the cash cows but it’s quite another to be unprepared when innovation takes the ground from underneath them.
If the milking of cash cows in mature companies turns managers into dairy farmers who never look at the weather outside, then the future for the organisation looks bleak. Senior executives can avoid these risks by taking appropriate action, such as introducing programmes aimed at encouraging innovation and progressive change within the organisation. They should also look at developing a sense of personal ownership and the need for accountability from bottom to top within the company. Most importantly, they should encourage the next generation in the organisation to embrace change and to be vigorous in pursuing it.
Once employees are inspired by the concept of intrapreneurialism, management should reinforce this culture with effective measurement and leadership to allow innovation to flourish. The entire structure of the organisation needs to be capable of reacting fast to changing consumer requirements and competitor progress.
CEOs should also look at recruiting appropriate talent to ensure the company is attuned to growth opportunities. The problem with cash cows is that they don’t have an infinite life and other organisations will quickly catch on to making a better product or service that more closely matches the requirements of the market.