A Cautionary Tale Of Innovation For A&D

3 September 2012 • 0 Comments

Last month, the Wall Street Journal ran a series that offers a cautionary tale about innovation for the aerospace and defense industries of North America and Europe.  Entitled “How Japan Lost Its Electronics Crown”, the stories relate how one-time giants of consumer electronics⎯Sony, Panasonic, Sharp⎯stumbled crossing the threshold from analog to digital, and now trail badly in the markets for e-readers, smartphones, and next-generation televisions. What happened? Did the upstarts at Apple, Amazon, and Samsung simply out-innovate the Japanese at their own game?

Not exactly. In fact, many of the technical innovations we find in these devices originated in the vaunted R&D labs of these same Japanese firms: electronic ink displays (Sony), cameras integrated to phones (Sharp), light-emitting diode televisions (Sony), to name three. Instead, what the entrants now credited with transforming these markets figured out that the Japanese incumbents missed was a subtle but powerful shift in how customers value electronics⎯from what the product does to what the user can do with his device. That shift, which I call the difference between performance and customization, subordinated those hardware competencies in which Japanese companies excelled, and elevated to the head of the value proposition competencies in programming, design, and services that innovate how ordinary users access and employ digital technologies. As reporter Daisuke Wakabayashi writes to explain the Kindle’s dominance over Sony’s short-lived Librie e-reader, “Sony was focused on selling devices, while Amazon was focused on selling books.”

Now, there could hardly be two industries whose characteristics are more different than one that makes gadgets for the masses and one that makes complex systems for bureaucratic buyers. So, what’s this tale got to do with innovation in aerospace and defense? It holds significance because our industry too is experiencing an inflection in customers’ preferences from performance to customization. And, just as in consumer electronics, that inflection is shifting the orientation of game-changing innovations from “hardware”, the Space-Age impulse to higher-faster-farther so deeply ingrained in our industry, to “software”, a caption meant to signify not just computer programming but the whole panoply of customer expectations animating the Information-Age maxim better-quicker-cheaper.

Consider, for example, the customer preferences and corresponding innovations that distinguish the promising next-generation space launch vehicle, SpaceX’s Falcon 9, from the recently-retired Space Shuttle. Falcon is hardly the marvel of technical achievement that was the Shuttle, but it is an exemplar of new design, manufacturing, and contracting practices that are changing how customers⎯hidebound NASA, among them⎯gain access to low-earth orbit. And while a dramatically cheaper price per pound to orbit is certainly central to the Falcon’s value proposition, it also manifests quicker development and arguably better design-for-reliability features.

The moral of this tale is germane to our entire industry, but it’s especially poignant for companies at each end of the spectrum of size. For the handful of prime contractors on the big end, the shift of innovation-advantage from hardware to software has hardly gone without notice. But responding effectively to that recognition will take more than mere edict. It requires reforming reflexes about innovation that have been honed to celebrated successes for over a century. It also requires overcoming the so-called Galápagos effect, by which the persistence of comfortable advantage in idiosyncratic home markets deflects attention from dynamism on the global landscape. At the same time, offsetting a big company’s challenging inheritance are ostensible advantages to realizing customized value arising from superior access to customers, end-users, and capital.

For the multitude of small enterprises at the other end of the spectrum, the significance of this shift is less obvious but equally profound: On a playing field of where customization counts, small scale and narrow scope can be turned to decisive advantage. Consider, for example, TECT (profiled on page X), a forging and machining company one might expect to seek innovation-advantage around hardware. Instead, it’s the company’s services-oriented, knowledge-based innovations and vertically-integrated structure⎯practices that don’t require large scale⎯ that mark its success.

All of which serves to underscores a still larger point about innovation in aerospace and defense: It still matters; the game is still on. But it’s a new innovation game with changed rules that are leveling the playing field once again.

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