Don't overlook process innovation in your quest for organic growth. The opposite fortunes of Toyota and GM have been so well documented that the story is taking on mythic proportions. We all know that once-dominant GM has continually lost market share while Toyota is poised to become the largest automobile manufacturer in the world. The most interesting part of the story, however, is how Toyota has gained its position. It didn't grow by providing the most innovative cars on the market, but by delivering the highest-quality cars to the market fastest.

A key to Toyota's competitive advantage has been its robust and flexible product-creation process. Take the development of hybrid vehicles as an example. When designing the Prius, Toyota required it to be built using existing production lines and manufacturing processes. Because of the high degree of flexibility in Toyota's production process, this required less compromise than one might imagine. The benefit of this flexibility conveyed two key advantages:

• Getting an innovative product to the market quickly - Since all the technology needed to produce the Prius already existed, Toyota could get the product to the market almost immediately.

• Minimizing risk - If consumers rejected the hybrid, the company could just go back to using its production lines for its traditional models. If consumers loved the Prius, Toyota could switch production accordingly.

While Toyota was busy getting an innovative product to the market, GM reportedly spent nearly $1 billion investing in fuel cell technology, which hasn't yet proven commercially viable. Clearly the commercialization of new hybrid technology is a significant product innovation. But what enabled Toyota to achieve this commercialization quickly and economically was its process innovation - refusing to do things the old way and instead inventing new approaches for delivering innovation to the market faster than anyone else. Process has proven to be Toyota's most enduring competitive advantage. Many firms strive to copy Toyota's production system, but in spite of volumes of literature, studies and attempts, none have mastered Toyota's process innovation.

Another process innovation leader, Lou Guiliano, former president and CEO of ITT industries, put the situation this way: "I contend that process innovation is the most important growth strategy of all in terms of both growth rate and value creation. Even in companies where new products represent 35 percent of revenue per year, there is still 65 percent left to impact with process innovation. The cost and risk to create process innovation is lower, and it is harder to imitate. Therefore, I believe it is an undervalued strategy in most businesses. It generates profits quickly, giving you even greater resources to invest in development, etc."

As Guiliano points out, not only does process innovation provide greater speed and effectiveness in new product development, but process innovation around product and service delivery can greatly improve the profitability of ongoing operations (i.e., in his example, the 65 percent of sales from existing products and services).

Dell is one of the best-known examples of process innovation. The PC market was founded by IBM, but product innovations allowed Compaq to take over industry leadership. Dell entered the PC market as an attacker, and created an operational architecture that allowed it to compress lead time close to one day - compared with more than two weeks for Compaq and other competitors. Dell's progress on lead time reduction is clearly reflected in increased work-in-process inventory turns (see Figure 1).

Process innovation has another advantage. As the number of PC options increased and lifecycles shortened in the industry, the related cost of complexity and overhead cost drove up Compaq's internal operational costs. In addition, the dealers and distributors cost Compaq a substantial markup. In contrast, with its lead time approaching one day, Dell dramatically reduced most of the internal operational complexity, overhead and obsolescence costs. The process innovation of achieving a one-day lead time allowed Dell to create a new business model by shipping preconfigured products directly to customers, eliminating the distribution costs. Dell's business model allowed it to operate at roughly 60 to 70 percent of the cost structure of Compaq.

The advantage conveyed by process innovations came not just from Dell's fulfillment process, but also its product design system. Dell created an innovative (and fast) design process that allowed it to quickly match Compaq and IBM's product innovations, which, coupled with its fast operational lead times, allowed it to bring any new innovation to market only slightly behind Compaq. This is a case where the process/business model innovator destroyed the shareholder value of the product innovators: Compaq was improvidently purchased by HP; the money-losing $12 billion IBM division was sold for about $1 billion. Dell's process/business model innovation was entirely disruptive because neither Compaq nor IBM copied the Dell process; rather they stood flat-footed with their product innovation strategy despite all the public information available.

The Profit in Process
Process speed creates two primary economic benefits. First, development times and therefore costs are reduced, lowering investment required for new product development. Second, fast processes get new products and services into the market sooner, accelerating earnings and increasing the lifecycle profitability.

The revenue area (darker shading) depicts the positive cash flow that occurs when the offering starts generating revenue. In most companies, these two areas are shaped by a number of errors and delays at almost every step in development. Here are just a few examples:
• Design, development and production areas work in isolation of each other, which leads to errors, waste and rework.
• Managers endorse any project that sounds good, ignoring capacity - the overload causes all projects to take longer than necessary.
• Unaware of customers' true needs, the companies tend to over-feature, which makes all phases longer than they need be.
• Engineers start each new product from scratch, rather than only inventing what must be new.
Because of these problems, the investment in development (light shading on the chart) is huge, and the company is likely to enter the market late when prices have already fallen due to commoditization (shortening both the height and width of the revenue area).

By contrast, a company that invests in doing these activities faster and smarter shortens the timeframe and reaps the rewards (Figure 3). If a company's investment in innovation starts earlier (more cash outflow in the detection stages), there is more investment in quick cycles of learning. (The investment "dips" correspond to resource-intensive events during the development cycle.) The customer knowledge gained upfront, however, pays off in shorter development time and higher margins because of greater differentiation.

Being faster also means companies can more rapidly introduce additional offerings or other innovations to the market. Achieving optimal speed comes from a combination of three different approaches:
1) Broad changes at the corporate level
2)Targeted improvements within processes
3)Design/innovation approaches that are inherently faster than traditional methods
Going into detail about all the techniques encompassed by these three areas is beyond the scope of this article, but here's a quick review of some of the most important.

Changes at the Corporate Level
Before getting into methods that improve speed, you first have to understand the sources of "slowness" at an organization. One of the biggest culprits is unprofitable complexity - products that do not generate sufficient return compared to the resources they consume. Some complexity is good, because you have to be able to offer the right mix of products and features to your customers. But most companies have too much complexity in the range of products they offer.

The burden these products impose on speed and profitability is enormous. Here's a small example that illustrates the larger problem: A national banking firm decided that it needed to start offering a wider range of retirement packages to both consumer and business customers. An analysis showed the staff ended up having to develop 4,000 separate spreadsheets to handle all the variations in product offerings they had to carry. Having one extra spreadsheet would be no big deal, but having to maintain 4,000 ate up a lot of time and energy that couldn't be recouped in terms of what the bank could charge for the service.

If you want to create a truly fast company, you need to begin looking at the full impact of your portfolio on the organization and determine which offerings are carrying their weight and which aren't.

Opportunities to eliminate whole process steps or flows (at least for some customers or transactions) can also greatly increase speed. One key to Dell's speed, for example, was its decision to eliminate the distribution channels entirely. The "price" in terms of absorbing the sales and service functions into the company was well worth the benefit it gained in terms of speed.

Process Improvements
Just as unnecessary product lines or features drag down the speed and profitability of an entire company, unnecessary work inside a process limits its speed and increases costs. It is important to expose and eliminate these sources of process.

Such work usually begins with a value-stream analysis of the processes you most want to speed up. The analysis exposes the areas with the greatest waste - the most excess inventory, the longest delays, the greatest amount of rework. Those problems can be addressed via lean and Six Sigma techniques, often to great effect. An aerospace company, for example, applied many lean and Six Sigma tools to achieve a strong competitive advantage; it was able to cut development costs in half and trim cycle time by two-thirds.

Fast Design/Innovation Techniques
The Toyota Prius story illustrates a design principle called reuse. Engineers no longer have carte blanche to use any materials or designs they want, but rather are restricted to using as many existing designs or components as they can. The savings in design time (and cost) are dramatic.

Another key principle can be illustrated by data collected by Emery Powell, a new product development director within a division of the Semiconductor Group at Texas Instruments that builds digital signal processing and analog chips. He took data comparing engineers that were multi-tasked (assigned to multiple projects) vs. those who were single-tasked (assigned to one project at a time).

As you can see, the amount of work that was totally or partially value-added - which they defined as including core design work and documentation - more than doubled (from 21 percent for multi-taskers to more than 45 percent for the single-taskers). Emery reports that this approach to increasing resource capacity has been a major factor in the improvement of Texas Instruments' product development execution in each business applying the principles. Examples of one-year improvements include:
• Design iterations were reduced by 25 percent
• Throughput in products per year increased by 40 percent
• Schedule slips dropped by 50 percent
• Time-to-market reduced by 40 percent

A Competitive Weapon
Process innovators know the value of speed and agility as a competitive weapon. As the companies cited in this article discovered, making the kinds of changes you need to achieve speed also:
• Tightly links strategy to the execution of that strategy
• Results in better balance sheet performance (PPE, inventory)
• Yields higher quality of outputs (service/products)
• Provides better customer loyalty/share gains due to higher service levels and quicker market response

Equally important, experience has shown that process advantages are much harder to copy than product innovations. Why? Because the speed-generating changes require major changes in how the business is run: how product value is evaluated, standards for operating processes, training and education on techniques for improving speed. These changes involve the whole organization, unlike product innovations, which usually involve only design and manufacturing staff. Focusing solely on incremental product introductions overlooks a critical area of the business: speed and agility. In short, process superiority may be the new key to innovation at a time when speed and agility often separate the winners from the losers.  

John Hubbs is director of marketing for George Group Consulting of Dallas. For more information, contact him at 972-789-3200. Excerpts and graphics for this article taken from Fast Innovation (McGraw-Hill, 2005).

©2006 Schofield Media Ltd.