Overcoming Technology Myopia of Industry 4.0

Originally published in ISE Magazine in September 2020.

Industry 4.0 (I4.0) is a technology paradigm born out of business necessities in order to address flipping order of competitive priorities that put agility and flexibility to the top. But popular I4.0 literature seems to have lost sight of the business necessities and is solely focusing on technology. Most I4.0 definitions just give a catalogue of productized technologies, at best a list of use cases, describing which technologies are relevant to I4.0 but missing a good holistic explanation of what I4.0 itself is. On the other hand, broader I4.0 ecosystem is focusing on `spot use cases` that relate to assets, connectivity and machine metrics with a goal to increase process productivity. Despite productivity is still important today, for many industries, competition takes place at the agility front. In contrast to process productivity, agility is a system attribute and requires system transformation. Also, agility is a top-line lever that acts in the market, not within the walls of a plant. For this reason, agility needs to be wrapped up with a strategy to grow market share and command a price premium on agility. Agility game is much more complex and bigger than what today's spot I4.0 products offer.

Since the I4.0 paradigm first introduced in 2011 as a sort of technology enabled manifesto for agility, flexibility and resiliency, I4.0's real meaning and purpose is almost forgotten now due to a series of misunderstandings. Nowadays, in business context, and even in academic literature, I4.0 has latently regressed to a I3.0 state embellished with lots of fancy technology names. Alignment of technology with business goals is not even pronounced, let alone aiming for competitive advantage through digital transformation and technological disruption. Unfortunately, today, I4.0 is almost totally reduced to machine metrics and some spot use cases that can only be defined as an augmentation of I3.0 heritage.

All in all, I call this phenomenon `technology myopia`. If you do not have thought about a system transformation plan and a new competition strategy enabled by technology, you are likely to be suffering from `technology myopia`. In this article, I expose and explore `technology myopia` in a way to help business leaders ask the right questions and adopt the right perspective to avoid technology myopia.

How we came to this point?

Since early 2000s, manufacturing industry was in need of a new strategy. Operations strategy of the time; outsourcing production to a low-cost country, seeking economies of scale and focusing on lean principles was not working as good as it used to. Main challenge was the imbalance of consumption and production in the world, which is still a valid challenge. Most of the consumption takes place in high-cost, high-wage countries whereas most of the production takes place in low-cost, low-wage countries more than 5000 miles away from the point of sale which imposes a lead time of more than 8 weeks. Making the lead time problem worse, after decades of offshoring, the labor arbitrage opportunities have been marginal for a long time. In addition to the obsolescence of the old strategy, markets have new rules. The new dynamics of competition imposes new imperatives that the old operations strategy cannot satisfy.

Every industry has its own speed that calls for a new operations strategy, but the trends are the same.

• At the macro level, world economy became more connected and dynamic. Globalization process culminated in a world so interconnected that there is no local crisis anymore. Likewise, there is no local opportunity due to blurring lines among industries and borderless competition. On the other hand, world is getting more and more eventful. Something important happens every day and triggers more. This dynamism adds another layer of complexity to world economy. In turn, new macro competitive reality is that companies have little time to adapt to changes and have to be the world's fastest to seize opportunities.
• At the political level, in developed countries, there is an increasing awareness on income inequality and erosion of middle-income segment. The loss of manufacturing jobs, after multi-decade long offshoring trend is considered the likely culprit. Similarly, a new consumer sentiment that prefers locally produced goods over imported ones is emerging across the globe. On the other hand, loss of manufacturing capacity became a national security concern in countries like USA, where production capacity of strategic components such as microchips and active pharmaceutical ingredients have been lost. Finally, protectionism in general, but in particular, raising tariff walls is another nail in the coffin of old operations strategy.
• At the market level, demand for every product and service is getting more volatile due to higher frequency of competitive moves. First line of battle is taking place with product launches. Product lifecycles are getting shorter as technology advances in an exponential speed and means to develop new products gets much more streamlined and automated. Additionally, more or less every product has its own fashion cycle, which also is getting shorter every year. But the forefront of high frequency competition is 'sales'. As companies gained better digital capabilities at revenue management and better equipped with deploying price and promotion responses to each other's moves, 'sales' now resembles `fast chess`. Now, FMCG industry competes in time buckets of hours and online retail competes at time buckets of minutes.
• At the customer level, digitalization increased the customers' default expectations. Online retail, telecom and fin-tech sector, offering value propositions such as `at your fingertips`, `same day delivery` and `customize / personalize your product` raised the customer's expectations to a degree where most manufacturers cannot satisfy. Also, competition has now more dimensions due to proliferation of substitutes and fragmentation of value chains. This added more dimensions to customer expectations. Now, every product is expected to have an `app` with some sort of digital ecosystem and complementing services.

In 2011, in Hannover trade fair, `industry 4.0` was introduced as a new operations strategy that was designed for the new market dynamics. At its core, Industry 4.0 is optimized for agility, flexibility and resiliency based on autonomous self-organizing, self-optimizing decentralized systems efficient enough to render onshore production feasible. Technology is at the center of Industry 4.0 paradigm, because an overall efficiency boost is needed to offset the high input costs of high-wage production context and to address its demographics challenges. Also, I4.0 efficiency should offset increasing costs after re-designing supply networks for agility, which often requires a greater number of smaller sites with more proximity to point of sales. The most important I4.0 lever is `price premium` of agility, which always require a good marketing strategy and some type of I4.0 enabled business model innovation.

How can you overcome the technology myopia of Industry 4.0?

First, do your own research and try to understand the original Industry 4.0 paradigm. Understanding the holistic and fluid nature of real I4.0 will help you imagine new ways to leverage I4.0 for growth. Re-imagine your products and business model in light of what is possible and what will become possible with technology.

Second, identify I4.0-relevant market opportunities. Underserved or emerging segments are typically the easiest to aim due to lack of established entry barriers. However, the sweet spot for I4.0 driven growth resides in catering to chaotic demand patterns with very low batch size and customization requirements. Entering in such segments is tough, let alone competing in. So, there is an inherent entry barrier due the difficulty of entering and operating in such segments. But do not assume this inherent entry barrier will protect you from threat of new entrants. Make sure you formulate a good competitive strategy to skim the market. Your I4.0 machine should reach to a robust scale and scope in these segments as fast as possible so that you can entrench and command a price premium as long as possible. But these segments are short lived. Be vigil, identify new segments, move on to next, enter with a plan to exit, repeat the same entry approach, excel at this loop.

Third, formulate a real competitive strategy. As Michael Porter explains in his 1996 article, “What is strategy”, operational effectiveness is not a strategy. Similarly, I4.0 is not a strategy. Strategy is all about creating and maintaining competitive advantage and advantage is ultimately relative and exogenous. To illustrate, shooting from high ground is advantageous and it is a strategy. Whereas, shooting rapidly and accurately is not a strategy, it is a competency, and in our analogy, it corresponds to I4.0. As I pointed out earlier, product and business model innovation play a critical role in complementing I4.0 with a real competitive advantage. Because digital transformation enables network effects, switching costs and learning curve driven advantages when product is connected to operations and wrapped with an innovative business model. As a side note, it is important to remember that I4.0 is not intended for productivity in its origins, thus, think twice if you are tempted by cost leadership strategy.

One of the most powerful strategies is to focus on disruptive operating models. Disruptive operating models require a re-imagined enterprise architecture, business model, market positioning and purposefully implemented technology. But the starting point is wild imagination and thinking outside the box. In 2004, an article published in Harvard Business Review, about Zara, one of the pioneers of disruption by agility, it was said:

 "Zara defies most of the current conventional wisdom about how supply chains should be run. In fact, some of Zara’s practices may seem questionable, if not downright crazy, when taken individually. "

To me, it is tempting to share my universal method for disruptive innovation. But I do not want to bias you. Start with blank slate. Minimum requirements from the third step is to define what type of supply chain capabilities are needed to enable your new competitive strategy. Some of the well-known I4.0 enabled supply chain capabilities are same day delivery, mass-customization/personalization, direct selling model, negative working capital requirement via pre-paid sales, smart & connected products, ditching international trade intermediaries with smart contracts and producing countercyclical products under the same roof. From here, you can parse supply chain capabilities to a `digital transformation vision` and then to `technology requirements`.

Now, you have the necessary awareness to go beyond technology myopia. But it is not over. Based on my management consulting experience, I want to depict two very common pitfalls even those who overcame the technology myopia tend to fall in. First one relates to doing the wrong thing in the best possible way. I had automotive industry clients which were furiously devoted to I4.0 but for products that will vanish soon, such as fuel pipes, exhaust systems and valve-trains. In these companies, when asked, executives acknowledge the fact that their products will eventually vanish. Despite the time horizon is known to be barely enough to pivot to a new segment successfully, complacency and decision avoidance prevail under the cloak of a fancy I4.0 strategy. Second pitfall relates to solving the easiest problem with the most expensive toolset. Most of the greenfield factories, decorated with the best machines and armed with cutting edge I4.0 technology, are assigned to the most stable demand segments. Also, the investment is usually justified with footprint consolidation. Both of these decisions defy the very idea of I4.0 since I4.0 works best with decentralization and advantageous in chaotic demand segments.

Finally, it is certain that markets will continue to evolve, impose new operational necessities and shuffle the order of competitive forces. Also, it is certain that technology will always be the first resort to enable the operations machine to align with the new market trends and competitive forces. I believe that this is already happening as global warming and sustainability of natural resources has obviously become a systemic threat to our planet. Despite this systemic threat has not yet become a dominant factor on customer choices, and while political frameworks are still lagging, corporations must adopt responsibility and lead the market. Additionally, the Covid-19 pandemic pushed many people to their next level of environmental awareness and make them question their consumption habits and value of owning things, which might be the bottom wave of a de-consumerism and green consumption trend that might usurp agility.

The call for imagination

Today, we live in a 150 trillion USD world economy with the record low cost of capital, at a time when many new technologies are just started to take off, thus, top-line focus offers much higher marginal returns than bottom-line focus. This is not only the business case for I4.0 but also for a call for imagination.

Be vigilant, see the big picture.

Saip Eren Yilmaz