The Future Of All Business: Proximity, Scale And Business Model Innovation

16 March, 2017 / Articles

We are witnessing the beginning of a proximity onslaught. Emerging technologies and new business models enabling companies to produce and provide products and services ever closer to the moment of demand. Rooftop solar installations producing energy on site. 3D printing generating increasingly complex products at locations far smaller than traditional industrial facilities. Delivery drones plying our roads and skies.

All of these technologies and others, from artificial intelligence and blockchain to Internet of Things and cloud, enable us to distribute sensing, intelligence, decision making, production and transactions to ever more granular and numerous locations across the economy. This access to every moment in time and space offers opportunities to serve customers in ways never before envisioned.

This isn’t new. Innovations such as “just-in-time” inventory or the photocopier enabled proximity. The difference today is the magnitude and velocity of the trend. Over the next couple of generations, proximity will create Schumpeterian “gales of creative destruction” remaking every industry.

An axiom explains this trend: customers want what they want, where and when they want it. The limiting factor has not been a lack of desire but a lack of capabilities. Businesses simply couldn’t competitively produce and provide most offerings at the moment of demand. This is changing.

Proximity presents profound implications for business. Here we’ll explore two– scale and business model change— and suggest paths forward.

Scale Ain’t What It Used To Be

Proximity changes the competitive relevance of scale. Some pundits argue that technologies such as 3D printing or crowdfunding hand the advantage to individual entrepreneurs or smaller companies— a simplistic assessment. While Uber was small when founded in 2009, it’s not small today. Few of the thousands of companies attempting to leverage Uber-like models will succeed.

Rather than advantaging small entrepreneurs, technologies that enable proximity exchange traditional heft for new forms of scale. Uber’s version of scale confers convenience and coverage. A user can access the same platform in hundreds of cities worldwide. Scale still matters, but for different reasons.

We today have a global industrial supply chain optimized for scale manufacturing at a distance. Generally, larger plants equal lower costs. Additive manufacturing will challenge traditional scale advantages particularly in cases where low production runs and/or local responsiveness add value, or where goods currently travel great distances. Consider that perhaps 20% of plastic automotive replacement parts cost more to transport than to manufacture. With a 3D printer, a dealer or consumer could hypothetically download a design file and hit print. Where on-site, on-demand production offers customer value, supply chains will transform.

Today, 3D printing capabilities and infrastructure are limited. Change over the next few years will be modest. Over the 10 to 20-year horizon, an array of products will succumb to additive manufacturing. Networked, distributed production will gradually complement or replace massive plants, though the transition won’t be linear. For many products, massive plants will continue to dominate for years. In other cases, large 3D printer farms might win. Still others will leverage numerous distributed, small-scale production capabilities, owned by themselves or others, benefiting from a scale of access rather than scale of ownership.

Hybrid models offer a path for incumbents. Continue optimizing traditional assets while simultaneously experimenting with production closer to demand. Those that do so are more likely to be ready when their customers are.

The transition will be difficult. Substituting new distributed production capacity for existing capacity negatively impacts asset utilization, a key performance metric. But those who don’t make the tough choices risk failure. Christensen shared the case of large integrated steel manufacturers failing to address the rise of minimills. A similar dynamic will occur across a wide swath of manufacturing.

Established players with longer strategy horizons will be able to phase in distributed manufacturing capacity, perhaps instead of adding traditional capacity. Some players might decide to focus on defending core, traditional capacity, but why risk an “all-in” strategy if you don’t have to? When paradigms truly shift, defending tradition rarely prevails.

New Worlds, New Requirements

Any robust proximity strategy must include a capability foreign to most enterprises: business model agility. Exploring and scaling business models on an ongoing basis.

In the 19th century, chemical industry pioneers BASF and DuPont invented the corporate R&D lab. What we might call the business model lab represents a 21st Century analogue, not replacing but complementing R&D. Ecosystems like Silicon Valley and Israel have succeeded in part because of widespread experimentation with new models. Start-up accelerators like Techstars or Y Combinator and innovation ecosystems like 1871 in Chicago are essentially business model labs, rapidly iterating combinations of technologies and business designs.

Smart incumbents are becoming more aggressive at such experimentation. GE created FastWorks to bring the power of start-up culture in to its centi-billion dollar enterprise. FastWorks enables rapid product and business concept iteration with customers even in heavy industry or regulated environments like power generation and healthcare. It’s a challenging cultural evolution that their CEO, Jeff Immelt, and Vice Chair, Beth Comstock, have personally championed. They know it’s essential for GE’s future.

Proximity As Foresight

Most businesses consider how new technologies might help them do what they already do, just better. This isn’t enough. The more potent opportunities and threats arise from technologies enabling what was hitherto impossible.

Alas, it’s tough envisioning what has yet to arise. An exercise with proximity can help. First, consider your company’s offerings. What is their value for your customers? Not your specific products or services, but their value to customers and/or their customers.

Now imagine 20 years from now. Assume that this value can be completely produced and provided proximate to demand. For the exercise, don’t argue about whether this will be possible. Assume it will be so. How might your industry look different? How might your company fit within this new world? Many companies will find their current offerings marginalized or irrelevant.

This exercise reminds me of a question I learned from Mike Johnson, the retired CEO of Castrol, the global lubricants leader. Under Johnson’s leadership, Castrol went from strength to strength, but he knew that in the future some customers might no longer need lubricants (e.g.—electric vehicles require no engine oil). In 2010, Johnson challenged his team to consider, “How will Castrol make money when people no longer need lubricants?” Castrol identified opportunities and built a portfolio of relevant projects— options on the future—through their corporate venturing arm, Castrol InnoVentures.

Customers don’t care about your products. They want to solve problems and live better lives. Companies that best offer this– a moving target– will win. Release your assumptions, consider how proximity might remake your industry, and get to work. You can be sure others are.

The science man and innovator, Fernando Fischmann, founder of Crystal Lagoons, recommends this article.

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