The Challenge Of Innovation

In a recent article in this publication, I wrote about the challenges faced by reps in our industry (April 2005 SCN). Lest anyone think that the grass is greener over in the manufacturers' yard, this article shows one of the many challenges faced by companies that design and build the products we use.

Competing In The Fast Lane

The companies who manufacture the products installed in our industry succeed or fail based on a myriad of complex factors. Any student of business from Harvard can quote hundreds of pages of research supporting theories, claims and hypotheses about what makes for success and what leads to failure. When we look at the companies in our industry that innovate, the leaders who find new ways to apply technology to produce better solutions to the problems systems designers and installers face, a few questions come to mind: How do they know what will work, what will sell and what will succeed? How do they know how long it will be before the next innovation from a competitor makes all of their hard work obsolete?

A recent trend in our industry is the result of a major upheaval across our entire lifestyle over the past 20 years. We've witnessed a simultaneous acceleration in innovation of new technology and in proliferation of products using this new technology, and at the same time an improvement in the reliability, functionality and utility of these same products. This has touched every part of our lives. The paradox is not well concealed:

1. We expect new improvements, better features and performance, and increased value (through lower prices and improved performance) on a regular basis.

2. We expect everything we buy to last for a very long time, giving us uninterrupted, flawless and reliable performance spanning many years.

3. So do the people to whom we sell our products!

Our "rational" expectation of reliability carries with it the parallel expectation of long life. Of course! Lifetime warranties, extended warranties, free warranties, etc., are common today in the marketing mix. Consumers are constantly bombarded with new offers built up around warranties (this is also true in our low-voltage systems integration industry). Marketing materials abound with the promise of extended serviceable life and warrantable performance over the course of that life.

Why would we as consumers and users as well as specifiers and installers expect both new innovations every six months to a year (or at least at the next trade show) and a useful (relevant) life lasting many years? Do we really value these both and pay a premium for them? Do the users of our products and services demand this from us as well? How can any manufacturer deliver both without sacrificing profitability and long-term health, not to mention short-term sanity?

Economics 101

Manufacturers recoup their development and manufacturing fixed costs and earn a profit by selling "enough" products over the course of the lifetime of the product. Accounting rules aside (companies must expense development costs in the U.S. in the period in which they are incurred), the shorter the expected life of the product is, the more difficult to earn a positive rate of return on the development costs, which must be spread over the unit volume of sales during the product's lifetime. Costs must be allocated in a way that does not price the product too high. This must be done in a way that does increase the price too much. When a product has a short life because of "expected" obsolescence (due to competition and user behavior), the costs of development must be spread out over a lower unit volume in sales. Guess what? The price should increase in the short run to cover these costs.

Products somehow must be designed and built to last a long time, even if the user wants to replace it with something else in a shorter period of time. But how long is the equipment sold in our industry really going to be used by the purchaser? What is the expected life of that new sound system just installed in a church or school, or that security system recently activated in some office complex? On the one hand, as soon as the next new feature or innovation is introduced, the shiny new device bought last year seems old and tattered in comparison, and users will start to clamor for upgrades and improvements. We've become so used to looking forward to new products like automobiles, computers, and even laundry detergent and ice cream flavors that our fickle impatience carries over into every aspect of our work as well. On the other hand, no right-minded church or school committee, or for-profit board of directors, is going to approve a major expenditure for a sound system, media system, security system, or the like, without carefully evaluating the investment over the useful life.

Sure, the church or school committee has invested scarce dollars and expects a long life and a healthy rate of return. Yet parents grumble during the very next performance at the elementary school that the middle school has a better hearing assistance system for the grandparents or more up-to-date-looking speakers. The choir director covets a new monitor-mixing console with a better software control interface. The security director reads about how his guards can have the front-door access control forwarded to the guard's cell phone, and realizes the system installed last year is now becoming obsolete. Will the insurance carrier even recognize its viability in their next audit?

And so it goes-the shiny new system of today is old and dusty tomorrow.

Elusive Return On Investment And "More" Risk Management

Ever wonder how manufacturers develop new products? Some just copy what's already there, making it less expensive or adding a few features the competitor forgot. Others strive to find something new to offer, whether it's in the application of existing technology or the development of new technology. Yet how long does it take to develop something new, and how can the investment be paid for? Even for the company that copies the competition, there is a development cycle that must somehow be measured and managed.

Today, it can actually take longer to develop and bring a new product to market than it will take for the market to adopt and use the product and then look for and adopt a replacement that offers something new. The life of the product in the sales arena is shorter than the development cycle in the "laboratory." Normal development cycles are roughly two to three years, and shelf life is now less than 18 months. This underscores the paradox and adds a set of risk factors that make the research ahead of actual development that much more crucial for overall success.

The graph of the Product Life Cycle shown above demonstrates that the opportunity for an increase in unit sales volume and profit comes only after the introductory phase, and continues into the decline, as investments have been recouped and payback complete. However, if the entire product life cycle is typically only 18 to 24 months, each phase is short and the window of opportunity small.

When you go to one of our industry trade shows or pick up one of our trade publications and flip through the ads, product reviews and the feature articles, you find that even the list of new products within a single product category is vast. In my role as a sales and marketing advisor to various companies (manufacturers, reps, industry associations and integrators within our industry and outside of it), I find innovation is both the lifeblood of success and the cause of heart failure. Engineering sets the process in motion on the path of discovery-what will our new roster of products look like next year? Three years from now? Five years from now? Meanwhile, marketing and sales are charged with selling what is on the shelves while being constantly vigilant about what the competition is offering, what resellers and users are saying, and what opportunities appear. Of course, by the time the field staff sees an opportunity, it is too late for engineering to start working on changes. Remember, the development cycle is two to three years. The actual shelf life is 18 months. Talk about hitting a moving target!

Luck is a huge factor in success in today's market place, despite all the research, logic and planning that many companies employ. The path to a positive return on investment is as difficult today as it has ever been, and appears to be even more risky than it ever was.

What's A Manufacturer To Do?

The way out of the paradox for a manufacturer is first to be realistic about strengths and weaknesses. Most companies are not, seeing success in some other part of the industry product map and believing that extending the success already experienced in one area to another is easy. Much of the proliferation is just that-line extension. But some companies do get it right.

By playing to its strengths, for example, a company may plan continual, incremental or "just-noticeable" innovations over the life of a given product. The successful innovators lead by constantly innovating, in fact by introducing products with built-in "place-markers" for future improvements, additions, modifications, revisions and other changes to maintain the appearance of innovation within a controlled setting. The company will plan a complete family of products, but enter with one model, leaving future innovations to complete the line, extending both up in value, price and performance, as well as down in price and features.

This means that the product-planning elements within the company must use good, scientific market research to be able to look out several years-to see not only what is feasible technologically, but also what is on the horizon, and to match that with what users will be asking for in the future. Leading by innovation is not an easy road. It is risky, expensive and fun.

What's A Contractor To Do?

During this same period of time, we've seen a tremendous shift in the "balance of power" from the supplier to the reseller. Look at how companies like Wal-Mart, Dell, Target and others have shifted power to the retailer and direct-to-end-user in mass merchandising. Has there been an equivalent shift of power in our industry as well?

Ask any sales rep, and you'll hear how the contractors, distributors and other resellers have been able to take advantage of the shorter product life cycle and the tremendous proliferation of product innovation to strike more favorable deals on existing product and fabulous introductory offers on new products. The pressure on manufacturers to sweeten the pot, so to speak, to get their products into the proposals and installations is a variant of the old rule of supply and demand-in times when supply increases, without a concurrent increase in demand, prices fall. We have seen this in the last five years, as the economies of many economically advanced countries struggle to squeeze out the last vestiges of the "irrational exuberance" of the late 20th Century. The contractor is in the driver's seat right now.

But, of course, nothing lasts forever. The smart money is always on change, however unpredictable. Look for further consolidation and mergers to swing the supply/demand curve more to the constrained demand side as manufacturers consolidate. Also, keep an eye out for the next great technological breakthrough. When it comes, the pendulum will swing a bit back to the innovators who build the stuff.